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Category: Market Analysis
Tags: buybacksearningsinvestmentstockstariffs
Entities: AppleCavaChinaCrowdStrikeFederal ReserveJapanJP MorganNetflixS&P 500Vietnam
00:00
Well, July is typically a strong month for stocks with the S&P 500 historically delivering an average return of one and a half% for investors since 2000. That makes July the third best month for stocks trailing just November and April
00:15
here. Now, here you're taking a look at where we typically see some of those returns net out.
And you can see where September has some sluggishness, the most sluggishness in terms of historical performance since 2000. But one of the things that we can also consider during
00:30
the month of July is both earnings and then additionally the types of volume that we typically have that is out of the system. And so ultimately you could see more of these swings or at least more complacency.
And so with some of those earnings reports that typically do
00:46
kick off the season, look out for names in the financial space. Look out for some of the early technological plays that are out there.
Netflix typically one of those that has been a stronger player over the course of 2025. And so if you do have the additive performance
01:02
of those major behemoths at the same time as they are setting the tone for the rest of the earning season, then July could be one that is set up for once again perhaps a repeating of what we've seen since 2000. But as a solid reminder, past performance does not always equal future results here.
Uh not
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everything is hitting records in this market. There are lagards out there.
One that caught my attention uh is Cava. Now, this is a name you covered on the IPO down uh at the New York Stock Exchange floor.
You've talked to the CEO Brett Schulman many times. Why is that name you think been underperforming?
To
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me, I mean, this is a company selling 10, 12, 13, 14, $15 bowls if you could get double protein. But I look at this ADP Jaws report, I'm thinking maybe consumers are pulling back on all that stuff.
What we're really seeing there is this rundown from this all-time high of
01:52
roughly $150 that we saw late last year as consumers really thought, how can I get the best bang for their buck? What's the best value here?
after the company really had expanded so rapidly and got into new markets. What we really saw
02:07
here was ultimately this this move this shift where they had this rapid expansion and these all these new consumers turning to Cava and then essentially after that growth we saw a bit of a slowdown albeit not as much of a slowdown as other fast casual
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restaurants had seen but once again we are far off that all-time high that we saw last year. shares now about $85 per share.
And ultimately what we want to see here is we want to see that rapid expansion working in their favor. We want to see new consumers coming in.
We
02:39
want to see retention and we really want to see that foot traffic continue to increase albeit although these locations are open for a while here. We're seeing a bit of a a tick move higher this morning after an upgrade from one analyst on the street.
And certainly that's holding on to momentum into the early innings here. J really uh the
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reason why I bring this up uh the first day of trading for this quarter uh yesterday we saw a rotation into the lagards. I mean some of the top performing stocks kick off this quarter were those stocks that did horribly in the second quarter.
What what is the play here? Do you put more money into those stocks hitting 52- week highs or
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do you lighten the load there and pick up some losers from the second quarter? Yeah, I think now's a good time to be bargain shopping.
uh it's been a really extreme move in in momentum stocks. That momentum factor in the mo in the markets
03:28
has been exceptionally strong year to date. One of the strongest runs in the last 20 years really.
And then on the flip side of that kind of traditional quality, high ROE, stable businesses have really performed poorly. And so I do expect, you know, that that obviously
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won't last forever. I do expect it'll shift.
Don't know when. you know, the the flip in the quarter yesterday started that perhaps, but uh yeah, I think now is a good time to be looking for high quality businesses that have underperformed recently.
But these bargain plays, um Jed, these are
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companies I would argue maybe not as fundamentally sound as some of the ones hitting 52 week highs. And I look at the Mag 7, those names have been redhot.
I look at the bargain hunters, we're getting ready to hit earnings season in a few weeks. These are the companies maybe overly exposed to tariffs, could see earnings warnings, and now their stocks get hit.
04:15
Yeah. Yeah, a lot of those fundamental factors you described do exist, but valuation also plays a role in in market returns.
And so I think we've seen um one example, Crowd Strike. It's a a wonderful business, it has risen to a valuation, you know, that's extremely
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high even even for its trading history. Um while I think it'll remain an awesome business, you know, maybe due for a breather.
First quarter share repurchases setting a quarterly record, rising more than 20% from Q4, spurred on by the top 20 companies in the S&P 500
04:47
according to data from S&P Dow Jones indices. Here with more analysis, we've got Howard Silverplot, who is the S&P Dow Jones indices, senior index analyst here.
Howard, always a great pleasure to grab some insights here with you. What is the driving force behind some of the
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buybacks that we've seen at this record level? Okay.
and and the items are changing. Q1 companies similar to buying cars loaded up a bit more on buybacks.
They were willing to do it. They didn't know what was coming down.
They knew
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they had to get shares employee options to negate those. So, we hit a record on there.
It went up. There was a lot of expenditures again for Q1 led by the normal uh run of people.
Apples, the Nvidas were up there, but also the JP
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Morgan's, Goldman Sachs, the financial, and they're going to be the big player in Q3. Uh, but Q1 increased as companies loaded up on shares, not knowing whether or not they're going to be able to buy going forward because of the economy, tariffs, and that potential increase in
05:53
taxes uh on buybacks, which there was talk about increasing it. Not in either bill.
We'll have to see how that works out in Washington over the next couple of days. But Q1 was the record.
Don't expect Q2 to be, but Q3 and Q4 will be. Why is that for Q2 where we did see uh a
06:12
sharp pullback in equities, right? And so we cratering wouldn't that I'm sorry.
No, no, no, no, no. You might you might already be hearing telepathically what I what I'm thinking and and that is wouldn't that cratering create an opportunity for companies who
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were saying all right we were already comfortable buying back stock in Q1 why wouldn't we continue and execute on what had already been announced in some of our repurchase plan authorizations especially when the price is average when you do it on a weighted basis 7%
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less get a bargain on that but they had already loaded up they were nervous about going forward forward uh and they spent a uh appears maybe about 280 281 we're getting the reports now so slightly less but what they did do
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because the prices were less got more shares for their dollar you know there's more groceries they bought because the prices were down so that's should help Q2 EPS on there because they bought back more shares and therefore you're reduc
07:17
reducing the share count and your EPS go up uh but they definitely pulled back a little. They were more nervous about the economy and tariffs costs uh their own business supply lines than they were about buybacks.
And again, they were uh
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bulked up Q3. However, we're looking to be potentially over 300 billion uh a new record on there and that's going to be where by the financial we've already seen financials uh uh almost a dozen of them increase their their uh buybacks
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and dividends and they are pushing buybacks a lot more than dividends even though the dividends are getting the the highlights on there. Uh, so we're looking for Q3 to increase on there, but with the higher prices where we stand now.
Again, Q2 might have been that
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bargain, but it looks like they're back to buying at the high side. Uh, if they're going to be increasing right now, as long as these prices, the 6200 level is holding.
Uh, so we may not get as big of a boost to the EPS, but you'll get more buying in there. But again,
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you're getting fewer shares in the third quarter. And fourth quarter by the way also looks again market holds levels hold earnings hold where they are about to be at least the estimates we'll get a fourth quarter uh record uh on top of
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that quarter three which was on top of Q1. So buybacks definitely are being favored by companies more than the dividends.
So what is and I was just about to ask you about that. What is the pass through effect from repurchases into dividends?
Because that actually
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decreased in Q1 by 2.1% according to your data. Yeah, and it's expected to decrease the next quarter uh as dividends show modest increase.
We'll do a dividend release next week for uh full Q2 numbers, but basically companies
09:10
continued to increase their dividends, but they did not increase them as much. They were not as generous.
They were holding back. They did not want to make that cash commitment going forward.
Again, my dividend, if I pay you 10 cents instead of nine, you expect that
09:25
10 cents to go continue on and eventually to be 11. Buybacks I could pull up and down by just uh calling the trader, stop buying, increasing buying.
Again, the plan on buybacks is not a requirement the way dividends are and a cash flow item. Uh so companies are
09:44
going more into the buybacks now. it supports their stock.
Okay. Uh the question is how much of it is going to be discretionary?
They always buy enough shares to negate options, employee options, because those are cheaper. I have an option exercises uh 30, the
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stock's 50, the company buys it at 50, gets 30 back. It only cost them 20.
When they go in to reduce their share count, it cost them that full 50. And that's controlled more by the board of directors than senior management.
And we're expecting the discretionary to slightly pick up in Q3 and Q4 and it
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look like it decrease in Q2. Again, we'll know that over the next several weeks as the earnings come in and the actual numbers, but buybacks companies, uh it's shorter term, more control, turn it on and off.
Dividends are commitment
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forever. Really fascinating data and insights.
Howard, always a pleasure to grab some time with you. Thank you.
Stock futures are lower this morning. following that disappointing private payrolls report.
Still, stocks are uh tra and trading right now causing
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speculation on Wall Street that markets could be in bubble territory. The rebound from lows in April to fresh all-time highs at the end of the second quarter, sparking a jump in Barclay's irrational exuberance gauge, which actually measures the percentage of stocks in euphoric territory.
It
11:06
currently sits just above 10%, which has signaled extreme frothiness in the past. So, what does this mean for investors?
is joining me now. We've got good friend of the show, Sam Stovall, CFR research chief investment strategist.
Sam, good to see you here this morning and thanks for taking some time ahead of the market
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open. First and foremost, I I would love to get your assessment of what is being dubbed and called this irrational exuberance with us essentially still in this ballpark of some of the all-time highs that we saw notched earlier this week.
Well, good morning, Brad. Uh yeah,
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I think people are a bit concerned because we went through a very steep V-shaped decline and then recovery. Yet, history actually says that that's typically what happens because we went from a new all-time high to the minus 10% threshold in only 22 calendar days
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versus the more normal 80 plus days. Uh that implied that this decline was going to be swift, shallow, and the recovery would be quick at hand, which is exactly what we got.
instead of the four months that we normally take uh to go into a
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correction and then another four months to get out of that correction, those numbers were essentially cut in half. And actually, because people are so concerned, uh I think that history again will remind us that we tend to advance another 10% following the recovery of
12:25
the old high. So, um, you know, while we can always see some sort of digestions of gains, uh, I think the overall trend remains upward.
And so with that in mind, if we're looking at an overall trend that remains upward, what what perhaps is the major kind of additive to
12:44
the mindset and and and how far out investors might be looking through some of the trade deal negotiations, through a bill that's working its way now back through the House and then Oh, yeah. We're trying to figure out exactly what companies might say during earnings season in the next few weeks here as
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that kicks off. Sure.
Well, I think that uh initial reactions are like dropping a pingpong ball on the table. The first response is the greatest and then subsequent ones are more muted and that's what we have seen regarding the the tariff situation uh regarding the uh
13:16
one big beautiful bill etc. Um, and also uh because we had a worry that we were headed for recession.
And bull markets don't die of old age, they die of fright. And what they're most afraid of is recession.
But because of the
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recovery, the old adage of prices lead fundamentals implies that maybe we're seeing uh a near-term bottom in terms of earnings projections. Q2 results are now expected to be up only about 2% versus the near 10% advance that was expected
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at the end of 2024. So, uh I think with the bar set so low uh that we'll probably end up seeing actual results exceed end of quarter estimates once again which will make the 63rd quarter out of the last 65.
You know, that's so
14:05
interesting and and I was discussing this yesterday with a few of our guests and would love to get your thoughts on this too since you raised the fact that this earnings growth rate uh could be one of the lowest growth rates that we we see since Q4 2023 according to Faxet
14:20
if it does come in at this 5% earnings growth rate for Q2 for the S&P 500. Can you can you make sense of the fact that we we've got that in one hand and then on the other hand you've got forward 12 month PE ratio sitting for the S&P 500
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at 21.9 which is above the 5-year and the 10-year average right now. That's right.
Well, I think your first thought is that uh Faxet's estimate for Q2 is above 5%. S&P capital IQ estimates which is what we use uh is about 2%.
So there
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is no uh fazby designated definition of operating earnings. Most people simply call it earnings before bad stuff.
Uh but still the bar is set very low and as my father used to say rarely do you injure yourself falling out of a
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basement window. So I think we probably will be surprised to the upside when Q2 results are are completed.
Uh but in terms of the PE ratio, you're absolutely right. If you look back uh over the many years uh the it is elevated, but I think
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that we're likely to see these earnings estimates increase as time goes on in a sense to match what happened with prices. Sam, we're marching to the opening bell here.
We got to leave the conversation there. Great to see you as always.
Thanks, Brad. Thank you.
Let's welcome in here Michael Reynolds, Glenme
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VP of investment strategy. Michael, great to see you.
Want to pick up there Michael what we were just talking about there, which was President Trump's big beautiful bill. Michael, I'm curious.
Let's say, Michael, that does get punched through here. You think the stock market would react and respond?
15:55
How, Michael? Yeah.
So, we're we're looking at some pretty big stimulus out of this bill. We've still got some fireworks in Congress here, maybe a little early for Fourth of July, but fireworks nonetheless on some of the details exactly how we're going to get this through before the Fourth of July recess.
Uh, but overall, we do think
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something's going to pass, and the details actually don't really matter all that much. But what we're looking at is some decent fiscal stimulus out of this.
Yeah, it may not match what we saw in the TCJA just back in 2017. But we're still looking for 2026 possibly as as much as8% tailwind to economic growth
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from the fiscal stimulus alone in this bill, which can help offset some of the impact of tariffs. On the other side, we're looking at how markets are digesting this and and there are some pockets where they're pricing this in perhaps a little bit probabilistically.
But once Congress is able to get over these hurdles on some of the details and get this moving to somewhere that's
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probably more workable for both sides is where you're going to start to see markets really start to price us in more fully. How do you think the bond market will react, Michael?
Lots of talk and you know this about this bill and what it means for our debts and deficits long term. There's quite a bit of chatter that you
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know the neither side of the political spectrum is really all that worried right now about impacts of debts and deficits at least when they have power at least. Uh we don't think that the Treasury markets are going to go too crazy on this.
We saw a little bit of it just a few months ago with the downgrading from Moody's that was
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short-lived. Not a lot of new information here.
I mean the the details of the bill and really the overarching structure is really wellnown and to to basically flip the script on how Treasury markets are going to digest this based on them just passing what's
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already sort of known would is sort of difficult to see from here. We'd expect a Treasury markets are going to digest this but longer term debts and deficits are something that Congress is going to have to get under control.
Whether that moment is now or even this year remains up for debate. and Michael.
So the the
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big beautiful bill one headline today, right? But we're also tracking this this trade deal with Vietnam that the president announced.
We do have this July 9th deadline out there, Michael. But it kind of feels like the markets have decided, you know what, Trump has backed off the kind of maximalist peak
18:03
tariff threat and we can kind of live with whatever's going to be imposed here. But what do you make of it?
Well, everyone loves a good Fourth of July sale and that 406 46% tariff that was going to be imposed on liberation day on Vietnam is now looking more like
18:18
20%. And so this is really informative for I think a couple reasons.
Uh Vietnam in particular is probably one of the countries the least amount of negotiation leverage here. We have a large trade deficit with them.
It's actually their exports to us are a large part of their economy. So they really
18:34
had to come to the table with some concessions. Uh but what it does tell us is that the administration is not going to insist on some of those eyepopping liberation day tariffs uh with with quite a few of our trade partners here.
Uh it may be indicative of what we could see of some sort of peer nations in the
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area like Cambodia, Laos or Malaysia where we have a similar setup large trade deficits that are end up being a large part of their economy. You could see some asymmetric trade deals.
The details matter. We got to kind of read between the lines on the Truth Social Post here before we really figure out exactly how this is going to shape up.
19:06
Uh but it does take off the table on the margin some of again those eyepopping numbers we saw on liberation day that gave the market its uh its biggest worries at the time. Michael, one other thing I'm just curious to get your take on is dollar weakness.
It's another important theme for investors. Dollar was down about 10% in the first half of
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the year. Do you see that weakness continuing, Michael?
Is it bottoming here? And and what does it mean for the market?
Dollar's coming off really just a decade of unrelenting strength. Even if we weren't seeing some of the trade policy stuff coming through this year as it has
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been, uh, at some point a little bit of a relief from that rally was relatively warranted and that the the trade aspect here is really kind of helping that here. We do think we can continue to see dollar weakness through the end of the year.
Uh, we're not calling for major changes to the reserve currency status
19:55
of the dollar. We think those concerns are overblown.
But could you see marginal weakness that gets the dollar on a purchasing power basis relatively more in line with its historical record? We certainly can see that.
And so when we're we're talking to our investors about how to take advantage of this, you got to make sure you have non-dollar
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denominated assets in your portfolio. And in a lot of cases, international equities really fit that bill because they're a productive asset.
And if you don't hedge the currency, you can actually benefit from a weakening dollar. Michael, great to have you on the show today.
Thanks so much for joining us. Appreciate it.
Have a nice holiday. Scott, great to see you.
So
20:26
let's talk about this market. Uh you talk about the positive, Scott.
Trump wants a deal on trade. You say tax is likely going down, deregulation, AI powered productivity.
It sounds great, Scott. So, walk us through the negatives, Scott, as you see, the potential negatives.
Yeah, look, and I
20:43
think I think Barbara did a really nice job sort of summarizing kind of what's what what's going on right now. We we agree with quite a lot of what she's already said.
Um, you know, like the negatives are are kind of kind of the obvious stuff. I mean, look, the geopolitics is always going to be out there, but it doesn't really matter.
um the the the ferocity with which the
20:58
market dis disregarded what happened in Iran um you know took took even me by surprise and and I you know I've been some of this hated Middle East stuff uh for the better part of 30 years. Um but this is that was that was fascinating even even by my standards.
Um but but you know like that that is you know that that was that's always going to be out
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there. Um and then you know as as Barbara highlighted earlier labor market is slowing things are slowing but there's a difference between slowing and slow.
Um and and it's it is you know we're by no means in any sort of bad stretch right now. And the low-end consumer is feeling a little bit of a pinch but uh almost logically low-end
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consumer doesn't really drive the bus economically in the United States. And so it is you know it's a little bit of a challenge but but it's not it's not that bad right now.
So the you know for us for us right now this is kind of a six out of 10 economy um and probably a seven out of 10 market uh like outlook. Um, so it's not we're not going gang busters, but uh but but it's not really
21:46
there's not that much out there to worry about right now if if liberation day tariff levels don't end up prevailing. How would you broadly characterize valuations here, Scott?
Yeah, valuations are are in the neighborhood of of fair. Um, look, the the the highv value high earning stocks are going to continue to
22:02
lead this market. I mean, everybody worries about the top of the market.
Everybody worries about concentration. Everybody worries about, you know, are we going back into like the 1999 2000 sort of levels of sort of bubbly NASDAQ sort of performance.
That's that's the parallel everybody wants to draw. And I think we're more in like the 1994, 1995 period.
Um, you know, so you know, this
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this is a that's this is a period where the tech is still going to lead. Um, and and is it going to be those high valuation stocks that that are going to continue to lead, but those high valuation stocks are are expensive for a reason.
You know, they have 30 40 50% margins uh in in some cases and they just make money handover fist. Um, and
22:34
so high high return on equity plus high plus high pees means that means, you know, doesn't mean those things are a sell. It means they're actually still a buy.
In terms of other places you you see opportunity, Scott, against the backdrop you kind of laid out there. Infrastructure, you say, walk us through that.
Yeah, infrastructure does is
22:50
pretty interesting right here. I mean, it's you you're starting to see a little bit of a bid to it.
Uh, really just over the last last couple weeks. Um, you know, the the big beautiful bill, you know, will probably help on on some of this because it'll it'll help, you know, it'll basically make capex free.
not free but but deductible immediately
23:05
which is a really big deal in terms of in terms of producing more stuff here in the United States. Um and then and then you have the the entire AI power generation trade that that you know kind of took off and then cooled off.
Um but but at the end of the day we're going to need to produce quite a lot more power in the United States than we do today. And all of those things all tie into uh
23:22
you know infrastructure being a pretty interesting place right here. How about Scott looking ahead?
Do you want to say US focused or would you also be eye eyeing opportunities overseas here? We we actually like overseas quite a lot right now uh much more than we have in in a while.
This has been a sort of a
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standing thesis for us most of this year. Um a lot of it has to do with the dollar.
You know we we do have you know a modestly negative view of the dollar right now. Um and this is this is stemming more from flows than it is from either interest rate differentials or growth differentials which are really the other two things that can typically drive currencies.
Um but it flows right
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now in terms of just just hedging uh hedging activity that we're starting to detect out of foreign holders of US financial assets. You know so you know foreign holders of US financial assets or foreigners hold $30 trillion worth of US stocks, bonds and treasuries.
Um and if it is if it becomes in their uh you
24:09
know in their interest to begin to increase their hedge ratios on that that means they have to sell dollars and that's just downward pressure on the dollar that that we are going to that we have seen so far this year and we think we're going to continue to see um as as portfolio flows sort of continue along that line. That's a big tailwind for international stocks.
Um and so you know
24:26
while you don't have uh tech outside of the US like outside of CH China and the US really um so I'm thinking specifically about Europe. uh you know so so you know we don't we don't have some of the drivers uh of of of the market we think or drivers of the economy that are that are yeah like really outside the US but for the next
24:41
six to 12 months you know that currency tailwind that you're going to get by by investing in international markets we think is going to be pretty strong well we're officially at the midpoint of the year and that milestone is a great opportunity to look back at calls investors and strategists made back in January joining me now we've got
24:57
Jonathan Ber who is the Ber research president you joined us back in January you had three picks from your forgotten 40 list. All names you predicted would outperform in the year ahead and all three have outperformed the S&P 500 so far.
This year they are down today, but
25:14
of course it's it's the longer term that we're looking at here. And so as you're thinking through and taking an assessment of those names and how they have performed here, walk us into your thinking for the second half of the year.
Are you leaning further into those names or rotating?
25:30
Uh, first, thank you for having me. And yes, you know, the forgotten 40 is the 40 best ideas for the year ahead.
Uber, Markell, and Atlanta Braves holdings, they all had short-term uh and medium-term catalysts. They've all done nicely, but we still think there's more
25:46
room to run in in each of them. Uh, you know, Uber is an extraordinarily interesting name.
And finally, you know, one of the things uh that I think is helping the stock is how muted of a response the robo taxi event Tesla had
26:02
in in Austin was. Uh investors are finally starting to realize that AI, I mean, autonomous vehicles is uh a beneficiary, not a threat.
And we think they'll continue to do so. Although there could be fits and starts along the
26:18
way as Elon Musk makes his announcements which generally have not come to pass. Well, to your to your point, yeah.
Yes. Uh, and I agree on that last point, but as we think about the reaction, the stock price correlation to these events
26:34
that Tesla holds, how big of either a weight or or maybe just a further proving point for what Uber has talked about even since they've gone public and that autonomous driving will bring down their operating cost per mile and thus that's something that they have to
26:49
invest heavily in over the course of the next several years. Do you see us finally hitting an inflection point for Uber as consumers become more uh you know more familiar with these types of services that are going to offer them
27:05
driverless vehicles and driverless rides? Well, one of the things well two things that are interesting with that one if you look at the stock market reaction on Elon's announcements they've gotten less dramatic over time.
I I mean I remember
27:20
a year or so ago the stock was down probably 15 20% in a month over over these fears. Now now it's it's it's much less so.
And in terms of the investing part of it, the beauty of owning Uber is it's really a capital light model. I
27:36
mean Whimo, uh Tesla, all the other ones are the ones investing a significant amount of capital. Uber is just going to be basically collecting a toll which is a great business.
we we'd much rather own that than the capital intensive heavier businesses. And then
27:52
additionally here, let's walk through some of these small caps that you're identifying and really believing uh believing in for the second half of this year. Where where are you seeing those opportunities?
Yeah, I mean it's broad-based. I mean small caps are probably one of the
28:08
cheapest areas of the market. Uh generally they do extremely well after the uh Fed stops a rate hiking cycle that has not come to pass yet.
Um so so um and they're also insulated from or
28:23
could be a beneficiary from tariffs as people invest more in the US or companies do. One of the ones that we really like uh and we disc we discussed in your show last time is Atlanta Braves Holdings.
There's two catalysts, one short and one medium-term. The
28:39
short-term catalyst is the 2-year spin-off milestone from uh that that they have uh is is set to expire in July, which means they could be sold without any adverse tax consequences. And it's controlled by media mogul John
28:55
Malone, who is not an emotional owner, and we think he'll take advantage of these high prices in these trophy assets to to sell the team. Plus, in 2027, there's a new tax law that comes out that gives publicly traded sports team
29:13
puts them at a significant competitive disadvantage to their privately uh held peers. And I think it'll force companies like uh Atlanta Braves Holdings and other uh publicly traded sports teams to go private.
And as we're thinking about
29:28
some of the small caps play and and really as you were kind of diving in on this specific play here with the Atlanta Braves holdings, I wonder more broadly across small caps right now if it's wise for investors to be stock picking with small caps or if you go towards an index
29:45
or perhaps, you know, an S&P 500 or an S&P 600 rather that has a profitability filter on it. Yeah.
I mean, listen, I'm we're we're biased. We're stock selectors.
I think if you're able to do the research and do the right and pick
30:01
the right stocks, uh that that's where you want to go and and find these kind of one-off names like Atlanta Braves Holdings um or Scott's Miracle Grow or some some of these others. If not, I think investors over the long period of time probably will do fine in the S&P
30:18
600 um index, but I think uh stock picking can do extraordinarily well over the next three and five years, especially in a small cap arena. All right, you were talking about the Braves and that had me looking up the freeze from Atlanta Braves games.
Uh he's got
30:33
to start winning some of these races, man. Jonathan, thanks so much for taking the time.
Thank you. Meta just hit a record high on Monday.
Nvidia's 17% surge the past month has it knocking on the door of a $4 trillion market cap. My question is this.
Should you own both
30:49
Meta and Nvidia in the face of their face ripping rallies? Chad, I'll start with you here.
If you had to pick one of these two names in the back half of the year, which one is it? I would perhaps go with Meta.
Uh there seems they have a continual competitive advantage and it
31:05
doesn't look like they're going to be in the crosshairs of the DOJ anytime soon. Uh, with that said, I'm sorry I'm going to pivot.
Uh, you want to own other companies within the Mag 7 that perhaps their valuations have been drastically discounted. Brooke, uh, you mentioned
31:22
earlier on this new super intelligence unit for Meta and it sounds great. It's led by Alexander Wang, uh, who who led Scale AI.
Sounds exciting on paper. What I can't figure out is how is this going to impact Meta's earnings this year?
I don't know if it will. Well, what Mark Zuckerberg says that
31:38
this is a necessity of the company. Of course, Mark Zuckerberg, the founder, the CEO of Meta, formerly known as Facebook.
But what he really said here was that he believes that this is the beginning of a new era for humanity, and he's fully committed to doing what it takes to for Meta to lead the way. Of
31:54
course, Meta looking to get ahead in this AI revolution that so many companies are looking to jump on board. And as you mentioned, he's brought in top executives from AI uh scale AI CEO Alexander Wang.
He also brought in former GitHub CEO uh as well as Nat
32:12
that's Nat Freiedman there. He also brought in 11 new hires who are really focused around this AI trade.
And he's really saying here, you know, investors really need to jump on and understand that this is not a want, a desire. This is a necessity for the company to
32:28
compete in the near term and really long term here. Brian Al, you know who's really driving the future of Amati?
That's Jensen Wong and Nvidia. Make the case for Nvidia.
Yeah, Nvidia, baby. The godfather of AI here.
And we've seen mega cap stocks, especially Nvidia, outperform. You were just talking about this share price move that we've seen up
32:45
about 15%. We are nearing closer and closer to that 4 trillion market cap.
And just a little context here, Brian, if Nvidia hits those levels, that would be valued 36% higher than the entire British stock market. That's the Footsie 100.
And just 18% below the total value
33:01
of Japan's Nicay 225. So that just goes to show the sheer enthusiasm around this company, around this stock.
Of course, earnings, that's huge for this company. If we see any deterioration on that front when it comes to demand along with the hyperscalers if they hint at any
33:19
sort of demand headwinds, Blackwell obviously a big focus for a lot of those investors. If we see that we could have a pullback in the stock, but so far earnings have been relatively steady moving to the upside and I think that is the big next test for Nvidia.
But I'm
33:35
bullish here and I think that Nvidia is going to continue to see a lot of those gains. The S&P 500 is entering the second half of the year after notching several all-time highs, but some technical indicators show that the rally could be under pressure as stocks enter overbought territory.
So, what does this
33:50
mean? Well, take a look here at the relative strength index, the RSI, which shows that stocks are at their most overbought since July of 2024 here.
And so one of the things that we can take into consideration with some of these overbought levels are the trades that
34:06
continue to be crowded into as well. And one of the most popular long trades continues to be long mag 7.
However, in the conversations that we've had over the course of this week, what is key even at these all-time high levels is to look for more breadth in this market. if
34:22
we did see more broadening out into the other 493 S&P 500 names. Oh yeah, and all of the other areas of the market that have not gotten the same type of fanfare as those and next to the AI trade.
That's what analysts and investors are going to be looking for
34:37
over the rest of the course of the summer where we were already anticipating some volatility, some chop on lower volume. And then additionally, you have the additive of some of the major events.
Two of which kicking off July. One, the tax bill and then two, of course, the post liberation day and now
34:55
liberation day 2.0 where we're expecting even more of the talk around trade negotiations. Now, a downside risk to the market, of course, right now is if we don't see any of these trade deals come forward where the White House had already talked about looking for
35:11
multiple deals to come over the finish line and good faith negotiations that were moving forward from the EU. It sounds like they're willing to accept some of the tariffs that the US and the counterparts and trade representatives are putting forward.
But the larger
35:26
consideration there is if we see more push back and more tough talk on trade, how that could potentially rattle markets, especially if you continue to hear some of the rhetoric targeted towards Asia-Pacific countries that have the larger outsized GDP footprint. Think
35:41
China, think Japan. And so that's where we're going to be continuing to track how stocks are in moving in reaction to some of those headlines here, especially if we do have weaker than expected volume that could catapult or leg up, leg down uh some of the activity,
35:56
especially as we've just recently got back to these all-time high levels that were unseen since February of this year. But some of the strength that we're seeing also may be tested going into this earnings season where hopefully we'll get a little bit more clarity on outlooks this coming after a quarter
36:12
where tariffs were the most repeated word over the course of the S&P 500's earnings reports. Steve, I want to pivot and get your thoughts on the bill.
Is this a tradable event for investors and and how would you rank this in priority of portfolio positioning and how traders
36:29
should be thinking about it? Well, I think a lot of it has to I'm going to take my cues largely from the bond market on this one because it what I'm what I fear it would be a real steepening of the yield curve.
Um we sort of s we saw the 10-year perform
36:44
pretty well into quarter end. Bond traders are not immune from window dressing either.
We do sort of see bond moves kind of culminate around quarter ends a lot of time. And if there are real concerns about the sustainability of the debt and deficit, you would see that reflected in higher 10-year yields
37:02
relative to shorter rates. Um I think I just saw a headline go by that that Powell is concerned about the sustainability of the debt under the new deal.
Wow. Under the new budget deal.
Um and so this would that was that's what I'm watching because you know you're also seeing a lot of times where the
37:17
dollar is is selling off even as rates are slightly higher. All things being equal, a higher rate should help a currency.
And the US actually has relatively high rates compared to the rest of the world. But yet, the dollar had one of its worst halves in decades.
37:33
And so, it's telling me that money is sort of leaking out of the US, whether it's stocks or bonds. That's why I look to bonds because if they're if they're starting to freak out, then then we kind of have to worry about the sustainability of the deficit and the debt.
You know, that's so fascinating and and what you were mentioning and
37:49
money leaking out of the US at the same time where you have the administration that is touting some of the international deal making that as we were watching the the international trip that President Trump took to uh the first one of his Trump 2.0 no presidency talking about where there are some of
38:06
these major entities, organizations both on the private sector side that are trying to get into certain regions of the world and those regions of the world that are looking to invest in the US. You know, all this considered, we're still looking at some of the record high exposure that foreign countries have to
38:24
US bonds right now that I believe we're still sitting at. So, you know, just help us make sense of that.
Why is it either net good or net bad if we did see some of that international holding of US bonds? Right now our biggest single export is our debt.
Basically we to put
38:42
it oversimplification on this. We we buy stuff from the rest of the world and they buy our they buy our debt to finance to finance this because our savings rate is not is not particularly good in the US.
So we we buy stuff from abroad and and and we it's sort of to
38:58
balance out the equation. They buy debt.
The problem is it doesn't take much if there was just even a marginal decline in the amount that they're willing to refinance or continue buying that would get hit because I don't know that there's you know the the domestic demand
39:13
with which to replace that. In theory if the trade deficit starts to come down meaningfully we don't need to replace it as much.
But then if the debt go if the de if the actual budget deficit goes up then we do need to replace it. So there's a lot of moving parts.
Bottom line here is you know the the stuff that
39:31
was mentioned in you know in that Middle Eastern trip were long-term investments. They're going to they're going to play out over a lot over a lot of time.
Refinancing government debt plays out continually. There's auctions almost there's there's auctions almost constantly.
So I'm not going to say that that some of these countries are going
39:47
to do anything you know to really be spiteful. I mean, you know, if China wanted to cause a little bit of short-term chaos, they could just sit out a bond auction one one day and and all of a sudden, you know, wa watch the chaos that ensues, but it would hurt them as well because they own so many
40:02
they they and the Japanese own, you know, trillions of US dollar debt collectively. And so there I don't think that's there's a not a high risk of it, but trading occurs at the margins.
And so if you see marginally less demand, it does have an effect on prices. In the
40:18
case of bonds, prices go down, yields go up if people sit out. Well, as of this morning, investors still pricing in the first rate cut of 2025 to come in September.
Fed chair Jerome Pal speaking earlier today at the European Central Bank Forum said the Fed will remain
40:33
paused until seeing the ultimate impact of President Trump's tariffs. In effect, we went on hold uh when we when we saw the size of the tariffs and where and essentially all all inflation forecasts for the United States went up materially as a consequence of the
40:49
tariffs. So, uh we we didn't overreact at in fact we didn't react at all.
We're simply taking some time. As long as the US economy is in a in solid shape, we think the the the prudent thing to do is to wait and learn more and see what those effects might be.
And again, they
41:04
they haven't really shown up. uh and you know so we're for now we're waiting.
So with the July 9th tariff deadline bearing down just 8 days away at this point pressure from President Trump and a week of economic data ahead. What should investors be expecting from the
41:21
Fed? I want to bring in my contributor for the hour.
We've got Steve Sausnik who is the Interactive Brokers chief strategist. Steve, great to have you back here in studio.
Great to be with you Brad. Let's talk through this.
What should investors be prioritizing as we go into the back half of this year kicking off with everything from trade
41:38
deals that are anticipated to continue to be negotiated hope hopefully netted out in some form or another also a Fed that is trying to be looking through and be data dependent as we get this week of economic data on the jobs front that they're paying close attention to. Oh
41:54
yeah, and then earning season starts in a couple weeks. that le let's try to lay them out, you know, in terms of chronological order and and I hope I can do this correctly.
We've got job numbers as you mentioned on Friday. Market's always looking to them.
The jolts were a bit of a jolt this morning. I think I think that's, you know, that that works
42:10
against the the concept of labor market weakness, but we'll get a clearer picture uh on f, you know, on Thursday, I should say, not Friday because it's the holiday. Um, in theory, the the budget bill should be signed at some point, but there's the back and forth.
I
42:25
don't, you know, it it talk about the not wanting to see the sausage being made, but there there's uh, you know, there's a lot of stuff going on behind the scenes. I it's too too difficult to figure out exactly how that shakes out, but I think the basic framework is there.
Um, then we get into then we have
42:41
the tariff moratoria next week, right? Do those expire or do those get pushed back again?
Um, you know, I I I again the the market seems to be looking through that and thinking that, you know, this will all be fine. there'll be deals done or at least there's enough negotiations to give cover to the idea
42:58
that there'll be push back. So, that's there.
Oh, and then guess what? It's earnings season all over again.
You know, it seems like we never left one, but we have that again. And um you know, one of my fears is some of the stocks that we've seen recently that have beat on topline, bottom line, and guidance
43:14
and then still get whacked. We saw it in Progress Software uh we today and we saw Micron a couple weeks ago.
um that is a concern going forward. And then of then you've got, you know, lurking in the background is what is the Fed going to do?
And Powell just said in in in the
43:30
gathering of central bankers in in Portugal that he's he doesn't expect any tariff effects to really be seen till the summer. So he's very much in wait and see mode.
The market may be a little bit ahead of him by by pricing in a full rate cut by September. But then again,
43:45
markets have always been ahead of the Fed. Remember remember the eight rate cuts that we're supposed to get in 2024.
Yeah. So, let's all see how this shakes out.
So many moving parts, but yet we still but yet we see a very quesscent market. VIX, you know, 17ish um is not is not expecting too much right now.
You
44:02
know, as we're thinking through how the markets are looking out into the future and anticipating that all of these matters will come to fruition in some facet or another. It's just a matter of for the checklist of trade deals, what
44:18
those deals actually look like in the details as well. It seems like the markets are already kind of factoring in this effective average tariff rate of around 10% here, which is still well higher than where we began the year at an average about 2%.
Jennifer Lee from
44:33
was reminding us yesterday here. And so if the markets are already factoring all of this in, how far out into the future do you think the markets are looking past much of what is a headwind at least as of right now on a on a concern checklist for investors?
I'm
44:49
actually going to take it the opposite way. The market doesn't look the market is looking like, you know, at itself.
It's very self-referential right now. It's all I I categorize this as a mix of FOMO and FOMO.
M it's all about momentum and to a certain extent FOMO of fear of missing out which is why yeah you've got
45:06
a relatively broad rally but really the gains are concentrated in the stuff you'd think it's concentrated in um when I broke down the first quarter performance um you know basically S SNP and I broke out the SGX versus the SVX
45:22
the growth components of the S&P 500 versus the value components the difference the growth outperformed the S&P as a whole by about 8 percentage points. The value underperformed the S&P as a whole by about eight eight percentage points, which means they, you
45:38
know, the value underperformance was about 16 or 17 percentage points altogether. That's huge.
That's telling you that all the action is in the growth sector. An SGX and NDX move essentially in lock step because it's basically dominated by the same companies.
Does Momo and FOMO mean that we're due for a
45:56
prolonged meltup in the markets? From what your assessment is, we're in the midst of a prolonged meltup.
That that's kind of what we're seeing. The question is what what gets it to stop and you never really know what that is.
I mean, this morning, you know, did you have the president threatening to deport Elon
46:12
Musk on your bingo card? No.
Um, and which is why we saw a little bit of red that and the fact that yesterday's close was basically just pure window dressing. Um, but you know, these are the kind of things.
So, so that's why I looked sort of toward earning season because the the
46:27
idea of companies doing well and yet not getting rewarded for it, that's the sort of thing that gets in the way of a momentum trade. Well, job openings increasing unexpectedly in May, rising to a six-month high at nearly 7.8 million openings, suggesting more
46:43
confidence in the labor market ahead of Thursday's jobs report. While US manufacturing remained somewhat sluggish in June, suggesting President Trump's tariffs are having an impact on business, manufacturing PMI rising to 49.
So some improvement from the pri the prior month, but we're still seeing that
46:59
gauge below the 50 mark indicating contradiction. So or contra contraction rather.
So here to discuss what it all means for the US economy, we've got Paul Grunwald, who is the S&P Global Ratings global chief economist here. Thanks so much for joining us on Good to be back.
Absolutely. Also with us for the
47:15
conversation, we still have Steve Sausnik of Interactive Brokers. So, as we really think through the data that we've seen come through and whether or not it's starting to line up in a trend fashion that would then pivot the Fed or at least get them firmly into cut camp.
47:31
Are we close or how many data points away from making that trend are we in your reading? Yeah, we think July is probably too early for the Fed to make its next uh cut.
they'd have to see a, you know, some bad employment numbers and then some weaker inflation numbers. And, you know, our baseline still got
47:48
this gradual slowdown in the US this year, but we don't think they're going to be ready to uh flip the switch in July, at least what we've seen the last couple of months, but as this morning's data show, we're still a little bit in this bouncy area where things are a bit all over the place. So, Steve, does does that set us up for September?
Then, it
48:03
could, assuming that assuming that we know what's going on in terms of tariffs and we know what the budget effects of the deal are going to be. Um, it sounds like certain members of of the board are are a little trigger trigger happy, others are not.
Um, Powell seems not to
48:18
be. Bostic Bastik's not voting, I think, is this time, but he seems not to be.
So, there's there's mixed commentary. Again, as I mentioned, the market tends to get ahead of the Fed a bit.
Um, but, you know, I'll I'll leave I'll leave the real underlying economics to Paul. And when we think about those underlying economics right now, where is the Fed
48:35
seeing the most area of concern at at this juncture, especially as they're hearing from everyone from President Trump chirping at Fed Chair Jerome Pal all the way through to some of the major investment institutions that are saying,
48:51
"Okay, yeah, now we're starting to think that they should be cutting as Yeah. Well, the the big issue is the uncertainty.
It's not, as we've said, it's not really the tariffs themselves. Those are a negative issue, but it's really all the uncertainty around tariffs.
We've got another date coming up on July 9th, which is the the pause on the April 2nd tariffs, and we just
49:08
don't know what's going on. And when people don't know what they're going on, they slow down investment, they slow down spending, they slow down capital allocation, they slow down M&A.
So, we've still got this overhang on the market and we'll see what happens on July 9th. We heard some noise about Japan this morning, but uh you know, as
49:24
long as that overhang is there, we still think we've got a sort of dampen dampen sentiment everywhere. Basically, you know, I want to stick with you for a second, Paul, because I was taking a look at one of the notes from Apollo chief economist Torson Slock this week.
It said when FOMC members produce their
49:39
forecasts ahead of Fed meetings, they are also asked how they view the risks to inflation and unemployment. And one of the net takeaways that this is a Fed that is worried about stagflation right now.
Yeah. Why is stagflation now one of the core worries for the Fed and to to
49:55
what extent are we placing probability around the reality of stagflation playing out? Yeah, we're not really in the stagflation cap.
We are going to get a rise in inflation rates because the tariff's going to lift the price level, but that's not really a driving force on inflation higher. So, I think we're still in this kind of traditional world.
50:11
The signals are very noisy, right? Because you are going to get a rise in inflation and a rise in unemployment and that's kind of stagflation.
But we think we're going to look through and the Fed's probably going to look through the jumps from the tariff versus any underlying inflation trends. We still think the next rates down.
How can
50:27
investors position their portfolio if we did see stagflation play out? What are the perhaps the stagflation positioning in a portfolio?
Stagflation is kind of like the worst of all scenarios. Now, I I'm I'm with Paul.
I I I think technically if you're looking at higher
50:44
at higher prices and a slowing and a stagnant economy that's stagflation but I think when the term gets thrown around we're we're nowhere close to what true like 70s style stag stagflation is correct can I jump in on the back of that and the other thing we're seeing now the positive thing that we didn't
51:00
see in the 70s is productivity growth remember the last couple of years US has been hitting the ball out of the park relative to the rest of its uh peer group strong productivity growth strong new business formation so That's not a recipe for sort of supply side, you know, uh, weakness. That's really a a
51:15
stagflation issue. So, I don't think that's really on the table right now.
You talk about that productivity growth and one of the questions that we've had for several jobs readings now perhaps for the perhaps for a couple dozen is where we might see AI start to show up within that productivity growth as well.
51:31
Yeah, that's kind of a big you know, even economists even really smart economists have got this huge range of outcomes, right? current Nobel laureates close to zero for the effect of AI on growth.
Some of the more um you know bullish guys on the street are one and a half% increase in growth over 5 years.
51:47
Some of the you know the IMF OECD are in the middle. We just don't know.
We know it's positive. We don't know when it's going to show up in the data and for how long it's going to last.
But uh it's got some it's got some potential. I wouldn't be watching kind of the month-to-month, you know, labor market data to see if we're going to see AI.
I think it's just a longer term kind of trend thing. But
52:04
definitely positive. Even if positive for productivity, is it still positive for overall headline jobs growth?
Yeah. Well, that's the thing.
You know, you can get you can have productivity go up by hiring fewer people or expanding the pie and hiring more people. So, that's the big thing with the AI.
Productivity is going to go up, but is it labor
52:20
enhancing or labor substituting? It's probably going to be a little bit of both.
We're going to have to tease those out. But again, that's a multi-year thing.
That's not a 20 We're not going to know the answer to that by the end of 2025, right? Look, we we just want to know all the answers all the time.
That's that's why we Sorry to disappoint you, Brad.
52:35
Great to have you here. Never a disappointment at all here.
Thank you so much for joining us in the studio. Let's welcome in here.
Jason Barcima, Halo Investing President and co-founder. Jason, is great to see you.
Let's start with the big news of the day, Jason. Senate does pass big beautiful bill now of course goes to the House.
Um I'm just
52:51
curious, Jason, how are you thinking through that market implications? Was this all priced into the market, Jason?
Yeah, I think a lot of it is is ultimately priced in. I I think that a lot of people thought that, you know, Trump was going to be able to get this bill passed, but it's really about setting up for the second half, right?
53:07
And and as your previous guest just talked about, you know, what are the earnings that we're going to see in the second half? What are really the tailwinds that we're going to see?
And most importantly, what's the central bank going to do, Josh? And I think that's what the market is really looking for, um, you know, at least in the back half of this year.
Do you think, Jason,
53:23
we see with the big beautiful bill, would you expect to see push back at some point from the bond market? There was a lot of hot talk and for good reasons.
Debts, deficits, although I'm looking at a tenure here at 425, Jason. Yeah, and you saw a big backup today
53:38
from, you know, partly because the big beautiful bill, but I also think part of the economic data that came out this morning, uh, with Jolt's job data ultimately, you know, jobs are looking good, the consumer is looking pretty good, and and it all depends on what Jaw wants to do. you know, you've got
53:55
expectations across the board of maybe three rate cuts, maybe no rate cuts, and I think there's an argument for something right in between. You know, my personal belief is the Fed should really be focused on at least one rate cut to give us some some wiggle room, but ultimately the big beautiful bill can be
54:11
very supportive of further economic growth. I think the trend in AI is here to stay.
Uh, and you're also seeing a broadening out of the rally, right? over 70% of companies now are trading above their 50-day moving average and that's something that we traditionally haven't
54:27
seen over the last 18 months. So for me and my perspective that's something to be really optimistic about you know over the course of the next 12 to 18 months in the market.
You mentioned earnings there Jason you know Q2 earnings season is on deck. Your expectations Jason is that going to be a positive catalyst for the market?
I think so. I mean,
54:44
especially with jobs in the consumer right now and with some more fiscal spending, it should be pretty healthy for earnings expectations. What I'm really looking at too is where are there the pockets of opportunity?
Clearly, we've seen a very pronounced growth in a
54:59
small set of names, traditionally the big tech names, but as I mentioned, you're seeing a broadening out of that ralliness, not just within the United States. Look at the rally that you've seen overseas.
And I think there's a lot of tailwinds when you're looking at Europe. But whether you're looking at the United States or Europe, whether
55:15
you're looking at earnings or what the Fed's going to do, there's going to be volatility, Josh. And that's what investors need to be prepared for over the course of, you know, the next six months.
And we saw that in Q1 and Q2, obviously, with April and Q2. I think the trend is going to be up, but the
55:32
path on that upward trend is going to be really volatile. investors need to look for ways to be able to play defense within their portfolios and protect the portfolios while being able to take advantage of, you know, potentially some buying opportunities we're going to see over the course of the next six months.
And Lou, I want to get you in here as
55:48
well about that Q2 earnings season. You know, Jason, broadly speaking, expecting good positive things.
Is that what you're looking for? Yeah, I'm looking for that.
We're talking about the unmagnificent 493 actually reporting much stronger growth than they have traditionally. Uh, Mag 7's still the big driver, but I'm like Jason, I think you
56:04
need to be opportunistic. This is not a time where you can index, per se, and just buy the big indexes even though they're hitting all-time highs.
You got to look for pockets of opportunity. Uh, energy is the most underweighted and undervalued sector in the S&P 500 right now, trading at about 15 times earnings.
That's interesting to me. I also think
56:19
you got to think of second derivative plays in AI. Uh, if you look at the Q1 GDP report for the US, it was terrible, right?
down a half percentage point, but there was a full percentage point of growth coming from AI. That's a a factor, a growth factor that I don't think many people have calculated yet in
56:35
the back half of the year. So, not just names like Nvidia.
Find those solution providers. Is it it's not just the chips, it's the platforms that deliver the AI services that could be more interesting in a market like this.
Jason, when you when you mentioned opportunities overseas, I'm just curious, you know, places like Europe, what interests you about that? Is it is
56:52
it purely a valuation call? Is it the stimulus they're providing?
It it's a little bit of of everything to your point Josh you know if you look at European stocks they trade at about a 35% discount to US stocks. So historically that's quite wide but if
57:07
you zoom out on the macro issues because ultimately trading at a discount to US stocks mean nothing when it comes to investing. It's really about what are the macro uh tailwinds behind it.
You've got central banks lowering rates. You've got healthy corporate balance sheets.
And obviously you're seeing a tremendous
57:22
amount of fiscal spending. you're seeing defense spending compared to spending that happened during World War II and ultimately World War I.
And that's not going to stop. And so with all of those different tailwinds plus a weakening dollar.
So even for American investors
57:38
with a weakening dollar, it may be advantageous to go and look overseas. I'm just saying ultimately do that with some downside protection in it because we saw a prolific rally in Q2 in European stocks.
We all know that, but I still think it's early within that game.
57:54
Back to L's point, ultimately though, there's pockets of opportunity here, and I think that investors should also be looking at small caps. Small caps are trading at a tremendous discount against large caps.
Uh, and I think there's some pockets of growth and opportunity in the small cap space. Jason, great to have you.
Great to have you on the show.
58:09
Thank you, sir. Yeah, thanks, Josh.
Federal Reserve Chair Jerome Pal speaking in Portugal on Tuesday told a gathering held by the European Central Bank that the US central bank may have changed their plans for the fight against inflation if not for the
58:24
president's trade deals. John Finus's Jennifer Shawnberger has more.
Hey there Josh. Fed share J Pal didn't take a rate cut off the table for the Fed's next policy meeting later this month and as you said said that if it weren't for tariffs the Fed would already be cutting
58:41
rates. Listen and on the data and um we are going meeting by meeting.
I mentioned um you know how how I'm thinking about that but I wouldn't take any meeting off the table or put it directly on the table. It's going to depend on how the how the data evolve.
58:58
Pal noted that a quote solid majority of the Fed's interest rate setting committee thinks it will be appropriate to begin lowering interest rates at some point later this year, explicitly saying in the remaining four interest rate setting meetings, which would include
59:14
the next meeting in July. When asked if the Fed would begin already cutting rates had it not been for tariffs, Pel had this to say.
I think that's right. where in effect we went on hold uh when we when we saw the size of the tariffs and where and essentially all all
59:30
inflation forecasts for the United States went up materially as a consequence of the tariffs. Pal reiterated that the Fed has not seen much of an impact yet from tariffs on inflation, noting that the central bank expects to see quote some higher
59:46
readings on inflation, but that officials are prepared to learn and that inflation could be higher, lower, later, or sooner than expected. Pal has roughly 10 months left in his term as chair.
And when asked what keeps him awake at
00:01
night, he says he wants to turn over an economy to his successor that is in good shape. Asked whether he would remain on as a Fed governor after his term ends as Fed chair next May, Pal said, "I don't have an answer for you today." Josh,
00:17
thank you, Jen. Jay Pal says, "Listen, we could have been cutting if not for those Trump tariffs." What do you make of that when you heard that?
I mean, I completely agree in the sense that we don't know right now what the impact of of tariffs on inflation is going to be just yet. And something that stood out
00:33
to me that that Powell reiterated in CRA was the fact that it's going to take a few months for that to show up. So, if anything, you know, it's derailed the Fed's progress towards moving towards more neutral territory sooner rather than later.
And we think they're still going to have to retain data dependent.
00:49
Either way, the trade backdrop is going to put upward pressure on inflation and we have to see what's going to happen there before they can go ahead with their with their cuts. Do you think Carrie that investors might be looking through PAL at this point?
What I mean is that you know his tenure is coming to
01:04
an end next spring and you know Trump no fan of Pal. He's going to I think you know nominate someone who may closely align with his views, his perspectives.
Do you think investors may be looking already post Pal? That's a great question and I mean what I'm thinking
01:19
about right now is is the inflationary forces at play and I think either way you know if history's any precedent we think that the labor side of the mandate is probably going to bear more weight than the inflation side of the mandate. Having said that we know there are
01:35
significant inflationary headwinds at this point in time. So our expectation is actually we think that the Fed will be in a place to cut rates in the fall, but we don't think they're going to have sufficient evidence that that's a permissible move uh by the time the July meeting comes around because if you
01:51
think about it, we haven't seen the impact of tariffs fully show up. We're waiting to see that play out.
Um on the labor market front, we have seen some weakness in the services sector and that's something I'm interested in seeing um in in this Thursday's NFP print. So our expectation is that we
02:06
think there will be um 106,000 jobs added to the US economy in June. Little bit weaker than May's 139,000 print.
Um but we are starting to see some evidence of an erosion in the services sector outside of healthcare. And we saw that with the GD GDP revisions last week.
02:23
Services sector consumption was up only 6/10en of a percent um on a quarter- annualized basis. That's the weakest that we've seen since the pandemic.
And while one quarter doesn't make a trend, I'm curious after the PC prints last week um to see how that plays out in the
02:42
labor market data this week because we saw a pullback in retail last month. We could start to see that again.
Transportation and warehousing has been hit by tariffs. Um and so, you know, it's really looking like the labor market has lost momentum or at least
02:57
it's slowed down from where it was last year. So lab so cooling, not crashing.
Exactly. On tariff inflation.
It's so interesting to me, Carrie, because I I we're waiting for tariff inflation and Jay Powell when we last he says he's waiting for it and he's very interested to see how it actually suses out who
03:14
pays for it. Is it Carrie and Josh or is it a producer or a seller?
What are the chances as an economist that the tariff inflation boogeyman actually never shows up? I think the chances are pretty low.
I mean, it's very unrealistic that the producers are going to be able to fully
03:31
absorb these costs and they've indicated themselves that they don't have sufficient profit margins to fully absorb these costs. And so, we think that they are going to start to be passed off to consumers.
Um, now last month's inflation data, we didn't really see any signs of this just yet. Though, I will mention that motor vehicle parts
03:46
and equipment did tick higher. Uh, again, one month doesn't make a trend, so we're going to have to see how that plays out.
Um but definitely we do expect it to start showing up but it but it takes a few months right because we saw a build in inventories so those products are going to shelves. People aren't paying those higher prices just
04:03
yet. Um but we do expect likely by the end of the summer we'll have an idea of what that's going to look like.
So the Carrie Freestone call for Fed cuts this year. How many Karen when do you expect they start?
So we expect three cuts this year and three likely next year. So we
04:18
have cuts starting in the fall right now. Um but again that does depend on how the inflation picture um prevails.
So Lou Kerry says three cuts this year. Does that align with Lou Bassin's call?
Yeah, I'm not the economist, but I have
04:33
been an outspoken not cut yet. But I'm with you.
July is too soon. I think what's interesting is we're waiting for GDAU in the the tariff uh inflation numbers, right?
Like we haven't seen it yet. Does it show up?
Uh Powell's getting this indefinite hold. He's playing diplomatic.
So I think for me,
04:49
everyone's acting as if we're on this perfectly balanced seessaw. If we put 25 basis points over here, it's going to tip one way.
It's really not that precise. So I think it's more to your point, when do they start?
When does the data justify the cut starting? I could see one to two by the end of this year uh barring some, you know, change in the
05:06
data. But I definitely think we're not going to where the president wants to zer like he mentioned, uh, you know, yesterday and heading into here.
But I I think everyone's focused on when's the trajectory starting to go down again. Carrie, finally, I'd be remiss if I didn't ask you about the big beautiful bill.
Senate passes it, goes to the
05:21
House, of course. Um Elon Musk not happy about it one bit, right?
He's on X and he's bring he is bringing up concerns, Carrie, that a lot of folks do, including some members of the House worries about the fiscal challenges, debts, and deficits. I'm just curious as an economist, how how do you see that bill?
So, when I'm thinking about the
05:38
bill, I mean, we have the TCJ extension that's already been baked into our forecast. So, at this point, that's not necessarily going to boost consumption.
It's just a continuation of the status quo. What's interesting to me is, you know, we have these Medicaid cuts and we also have an increase um in the salt cap
05:56
deductions. And so what that means is we're in a situation where we're transferring purchasing power away from lower income consumers towards higher income consumers.
And it is those higher income consumers that typically drive the hard data. One thing I want to keep in mind though is the fact that higher
06:11
income consumers do have um a higher propensity to save. So just because they have that extra money in their pocket doesn't mean they're spending it.
And it's interesting because right now we've seen again some weakness in the services sector, specifically in transportation services, accommodation, and food
06:26
services. That's where wealthier folks spend their money.
So I'm worried that this group may be stuck in uncertainty paralysis and maybe a bit spooked in ramping up their savings. So, I don't know whether, you know, this bill once it's passed is actually going to move the needle when it comes to consumption
06:42
or if everybody's just worried about, you know, this this uncertainty that we're facing. So, maybe they're worried, Carrie, but I wonder when you look at the market and the run we've had, you're back at records, the wealth effect for those folks, too.
How does that variable factor in? Absolutely.
I mean, that that really is kind of the driving force
06:57
behind why we've seen a deviation in the soft data and the hard data. The sentiment data has eroded, but to date there hasn't been a significant erosion in the hard data.
Started to see signs, but um not a material erosion just yet. Carrie, always great to see you, especially on set.
Thanks again.