The Compound and Friends - Aggressively Neutral

Episode Date: June 21, 2024

On episode 147 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets, to discuss: small cap stocks, Nvidia's valuation, waning short interest, potential upside surprises, mortgage rates, and much more! This episode is sponsored by Goldman Sachs Asset Management. Learn more about Goldman Sachs Asset Management Premium Income ETFs at: https://www.gsam.com Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Oh, you know what I just watched on... I think it's on Netflix or on Macs. There's a Gene Wilder documentary. Oh yeah. Any good? Did you see it? No, not yet. Loved it. Loved it. He had quite a career.

So I never saw those earlier movies with Pryor that you were telling me about. Toys and others? He's not in the toy, but he's in Silver Streak where he goes to... Him and Richard Pryor go to jail. I haven't seen any of those. Oh no. That's stir crazy. And Willy Wonka, there's a whole thing about Willy Wonka. And then he did the other one with Richard Pryor.

Hear no evil, see no evil. Richard Pryor is blind and Gene Wilder is deaf. And they... But they're like very respectful to people. I don't think you can make that movie today for obvious reasons, but they didn't treat it like a complete and utter farce. Like I think they tried to bring some humanity

to the roles, but it was, I don't know. I don't think that would get Queen lit right now. That might be a tough one. So are you based out of New York? Yeah. Yeah. We're down in Battery Park City. Okay. Nice. Yeah. So we're in the Brookfield Place Mall. Okay. It's cool to work down there. Have you been down there like a little... I was saying I like the... there's a PJ Clark's

that's indoor outdoor. I don't think I've ever been to that one. And because right, so right outside of that is where all the boats are pulled up. And there's a scene in the Wolf of Wall Street where Leo DiCaprio is on his boat. Yeah. That's where they're docked. That's where they, that's where they filmed that. Peter Clark's my, that's your favorite basic burger in the city, right? No, J.G. Mellon. J.G. Wentworth.

J.G. Wentworth. J.G. Wentworth. J.G. Mellon JG Wentworth JG went worth JG Mellon I think is the best over all the one that we sidecar that that's that no that's PJ clogs on 50th oh yeah what's JG Mellon 70th 73rd Street JG Mellon there's only one PJ clogs is a five little JG oh yeah you know this place yeah oh we've been there yeah yeah that's I think that's the best one and when I used to live up there you know who is there all the time Rudy G because it's like it's like it's in the neighborhood of Gracie Mansion all right you mentioned. All right, so about good? Just about. I'm out of small talk. I'm dry. If I was wearing a tropical brush shirt, then there would be something to talk about.

Laurie, I told two people I know that you were coming on the show this week. Oh, what did they say? I don't think you, do you know like how well regarded you are? No. Amongst like technical analysis? No, can I be honest? I'm very shy socially like awkward introvert. So whenever people say they like me it like turns into a huddle. People really like you. I spoke to two different people that are technicians and said we have Laurie coming on and they were both excited. Oh, that's so nice. Yeah, you have a following.

No, they have at work. Because Halima and I got named to this Barron's 100 Most Influential Women in Finance list. And RBC actually threw a reception for us. When was this? This was a couple of weeks ago at our energy conference. You must have loved that, not? I'm not at all.

Did you have to give a speech? No, but they gave a speech about us and it was very funny. And I was convinced nobody was going to show up and it was so crowded I couldn't hear anything. I mean, it was crazy. Wait, really? How many people came? It was at the Energy Con...

Put these on so you could hear yourself. It was at the Energy Conference, so there must have been a couple hundred people there. I don't know, it was in a big ballroom. Okay. But yeah. But you must have been excited excited, like flattered. It was.

It's nice to work at a place where they really value Macro. And you know, we're sort of brand investors for the firm, right? In addition to, you know, working with investors, but they really do, they really do like us. I mean, I know that sounds silly, but like at a lot of firms, Macro is a cost center. Okay. And it's a little bit more difficult to monetize, you know, on trading desks and that sort of thing. But like they're really proud of us. That's interesting because like research, like equity research is a no brainer. You say we're bullish on Apple and trades on Apple come in through the desk instantly.

Right. And it's with the market, you make a call on the S&P 500. There are some people right in the derivatives world that will make trades on that, but most of the people we're talking to are portfolio managers. So it's kind of a longer term market view. You have to have it. You have to have a framework for how you see the environment. Right. But most of our clients are not going to go out and make a trade that day based on our S&P target or a sector overweight or underweight.

So it's more general education. You should just make more extreme calls. Yeah. And that'll get them trading. I still don't know how these croquet balls got here. What do you mean? Why is this such a mystery to you? Were they delivered?

So I've been waiting, I've actually been waiting for you to notice. I don't like what's happening right now. Croquet fairy, Brolin. I've been waiting for you to notice. I did this for you. I don't notice anything. I've been waiting for you to notice. I did this for you. I don't notice anything. I'm very oblivious to my surroundings.

Well, I was noticing that some are kind of dull and some are new. That's what was confusing me. Got some new ones and some old ones. Are these from, what's that store in the mall that sells this bullshit? You know what I'm talking about. No.

Nicole? What's the store in the mall that sells nonsense? It's not nonsense. They're vintage croquet balls. What did you say? Newberry College? I'm Ruby. Spencer's? No.

Keep going. Closer. Closer. No. All right. Sorry. Josh, what were you waiting to show me? What was the... Alright. Go watch...

Go watch the last episode of the last season of Curb Your Enthusiasm. This is what Larry David has on the table in his den. Okay? I did this for you. I've been waiting for you to notice. How would I have noticed? I guess it's way too obscure. I guess way too obscure. Go back and watch the last episode of, or the last season of Curb Your Enthusiasm. Pretty good.

When he's in the den watching stuff about his trial, this is what's like literally right in front of him. There we go. So, I do everything for you. Thank you. What is it in this? Alright. Hey John, what show are we doing? Coming in first, in second, in third, in fourth, in fifth, in sixth, in seventh, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth, in eighth? All right. Hey John, what show are we doing? Come on in friends, it's the One 47. One 47?

Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Red Holes Wealth Management. This podcast is for informational purposes only and should not be read for entertainment purposes only. If you have any questions or comments, please feel free to ask them in the comments section. We'll be happy to answer them. Thank you.

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ridholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholtz Wealth Management may maintain positions in the securities discussed in this podcast. This episode is brought to you by Goldman Sachs Asset Management.

The Goldman Sachs Core Premium Income ETFs, GPICS with an X and GPIC with a Q, offer long exposure to the S&P 500 and NASDAQ 100 respectively with an options overlay strategy that seeks to deliver a steady stream of income from the selling of options premiums. That is in exchange for some upside participation to the market. GPICS and GPIC are actively managed

by GSAM's portfolio management team who deploy a dynamic options overlay strategy. See the link in the description for more information on Goldman Sachs Asset Management premium income ETFs. Ladies and gentlemen, welcome to the Compound and Friends episode 147. Morrie is mesmerized by what I'm doing here at my console. We're so happy to have you.

People are excited that you're coming on the show. Lori is the head of U.S. equity strategy at RBC Capital Markets, where she is responsible for the U.S. equity market outlook and S&P 500 price targets. Prior to RBC, Lori spent time at Credit Suisse and Citi. Prior to RBC, Lori spent time at Credit Suisse and Citi. Lori also hosts the Markets in Motion podcast and appears on CNBC, Bloomberg, Barron's, and many more. Lori Calvicino, welcome to The Compound and Friends.

Thanks for having me. Good to be here. I'm so pumped for this. You do an unbelievable job illustrating the biggest trends in the market. And we were looking at your weekly research this week. I can't believe how many charts you're putting out on a weekly basis.

And I want to hear about your process. The only person I've ever seen with that many charts is J.C. Peretz. You go hard in the paint. You really do. Has that always been the case? Or has your style evolved over the years? Tell me about your process.

So if I think back, when did I start? I started over at Citi in 2000. And I was working for other people. Worked for some amazing strategists. But I think sort of my early days as an associate, one of the things that I didn't always like was the idea that strategists sort of come up with a story. And then I had one boss who would send me out to

go fetch a chart essentially, borrow it from another analyst. And so come up with a story and then just go out and find charts to support your narrative. Oh, so backwards. Right. That always seemed backwards to me. I never liked that process.

Couldn't say anything, though. No. And I was the peon. So when I became a small cap strategist, I think it was 2007 and I kind of started doing all the work in 2006. I had this framework called the drivers and I don't use it anymore because it's really, really clunky, but it was deals and cash deployment, revisions and earnings, investor sentiment and positioning for the eye, V was valuation, E was economy, and R was really a stretch, retail money flows.

So it was kind of this- Well, I was- Yeah, but it was this, you know, I came up with this acrament and I said, within each of these buckets, I'm going to go through and find things that I think always drive markets and should always be paid attention to. And so, you know, that was just sort of my process. that I think always drive markets and should always be paid attention to. That was just sort of my process. When I finally had that opportunity to build my own products the way I wanted to,

it was for Russell 2000, it was for Small Cap, it was very quantitative oriented. I am going to always look at these things and see what story it is telling me as opposed to the other way around. So it's your starting point. It's my starting point. And you're checking in and you're looking for when things are changing or diverging from those. Exactly. Okay. Exactly, sometimes there's noise in a chart, right? And sometimes you're getting conflicting signals. And I will say. All the time.

All the time. And I talk a lot about conflicting cross currents has been sort of a big theme of our research this year. But I think it's really important. And look, I never had liquidity properly, sort of replicated in that driver's process. But I just feel like inherently, from a philosophical perspective,

the way I want my research to work is I want to look for kind of what the true story is out there, not just the interesting story to tell. Because at the end of the day, my job is to help investors do their jobs. And I take that responsibility very, very seriously. Is it hard to look at everything that you look at, have a story, and then it looks like the story is changing

because charts are noisy, but then it doesn't change? Like how do you know when the story has definitively changed to the point where you need to change what you're saying? How do you know what's counter trend versus, oh wait, this is a new trend? I think it's never the same. One of the reasons why I like to put out as much as I do is so I can talk about it.

So remember that I'm sitting in equity research and I need to be published on things that I talk about. And so we have our market calls, we have our thesis on a sector. But if I see something interesting in a chart, right, I can write about it and talk about it, it's out there, and I can go talk to investors about it. So I think that process of having the conversations

and debating what I'm seeing in the data with investors, I think that helps you figure out when you're seeing what's really kind of noise versus inflection. What sort of timeframe are you looking at? Are you longer term, intermediate? I think people have different definitions of what those timeframes are.

To me, when I think about a price target or I think about a sector call, I really try to be on a six to 12 month time horizon. And if I ever use the word tactical, that's gonna be something less than that. So it's very rarely gonna be a day or a week, but think about that as more over the next few months. Why six to 12 months?

Is that sufficient to screen out the day-to-day noise but still be actionable enough that people care what you're saying? I think it's more practical if I think about I work a lot with institutions and you know they sort of look at one, three, and five-year track records and I feel like my tools don't necessarily lend themselves well to a five-year view but I do think most of the investors I speak with on a regular basis are trying to make their year, right? And so that may have an October fiscal end

or a December fiscal year end, but we generally put out these big outlook reports at the beginning of the year. And we're really trying to talk about the year. And by the time you get to the second half of the year, and this is coming up in conversations now, I feel like in some respects 2024 is fully reflected in the stock market pricing right now.

And so the second half of 2024, I think is going to really be defined by people pre-trading opinions about what 2025 is going to look like. I think we're sort of at that transition point. But frankly, it's just, I feel like that's how well my tools work. I don't necessarily feel like they really work

on a three-year basis. I don't necessarily feel like they work on a a three-year basis. I don't necessarily feel like they work on a one-day or a one-week basis. Before we get into all the stories this week, what are some of the tools that we're going to be looking at? Like what's in your toolbox? So I would say a couple of things that I'm talking about right now

that we always talk about are our sentiment models. And these are pretty basic, right? We're looking at weekly CFTC data on US equity market future positioning, so we aggregate together. Commitment of traders? Exactly. And so adding up NASDAQ futures positioning, small cap, S&P, mid cap, Dow, those sorts

of things. And we can get that data weekly, and it's been a pretty good contrarian signal over time. And then also, I really like the AAII, Net Bullishness Data Point that you can also get weekly. So I'd say those are two things we talk about quite a bit that I've used for a long time, to be honest. Another thing in the toolbox we use is our valuation model, which is actually a newer

model that we developed in the summer of 2022. And this was, you know, at the time, I think I'd had some turnover on my team. I was rebuilding a bunch of models, you know, literally, you know, still sitting in my basement a lot, kind of like pouring through thinking about what drives valuations. And we can talk about it more later, but it's really just looking at inflation, interest rates, consensus assumptions on those variables, and what do they forecast, what do they imply about PEs based on relationships going all the way back to the 1960s.

So it's a little bit of a more kind of longer term, I would say, unique model. It forecasts trailing PEs, not forward PEs. That's somewhat controversial, but we find it works a little bit better. Why is it controversial? If you talk to most portfolio managers or investors, I think we've just been trained in the industry to look at forward earnings multiples.

That's just really what everybody does. I happen to have access to data that goes back to the 1960s that measures a trailing average PE for the S&P 500. I can't replicate that data on a forward PE. So to some extent, it's just a practicality issue. But I think people inherently think you should be looking at the stock price today and future earnings. I think there's a lot of diciness,

visibility issues around that. And frankly, I've just never had any luck building a model that forecasts that very well. But I have had luck building something that forecasts the trailing P.E. So this is one of those years where that concept of what are rates doing versus what are P.E. ratios doing? Exactly. It would have been backwards though. Yeah. So if you think about how the model works, like, and this was a conversation we had a lot last year. I think a lot of people were looking

at 10-year treasury yields and forward PEs and saying, well, the PE should be around 15 or 16 times based on where the 10-year treasury yield is. 10-year at four and change, you should have a lower PE. And you do a simple regression, puts you into a mid-teens multiple. And so everyone was scratching their heads, saying why in the world is the multiple so high? And we actually looked at the trailing PE,

and then we layered in consensus assumptions for interest rates and inflation at the end of the year. So it was still forward looking, even though it was a trailing multiple. And we said, well, based on where people think rates are gonna be, where inflation is gonna be, it says at the end of the year, the PE should be this,

based on these historical relationships. And we came up with a higher number. So we were coming up with numbers in the low 20s, as opposed to that 15, 16 times multiple. So I had a lot of my competitors saying, well, the market's overvalued, we're not going to pay these multiples, yada, yada, yada, this isn't deserved.

And we said, actually, where the market's trading kind of makes sense based on where people think inflation and rates are headed. Well, I'm just a little confused. Why do you feel the need to predict? If you're predicting trailing PE, isn't that the same as estimating the forward? Not predicting it, incorporating it.

It's predicting where the trailing PE will be at the end of this year. How is that different from like forward stuff? It's just different math, if that makes sense. And if you look at trailing PEs, they tend to be a little bit higher than forward PEs. Forward PEs are also a constantly moving target. And I think when I look at the modeling,

this is something that I, maybe I overly focus on this a little bit, but if you see a typical chart on a forward PE from a strategist, and let's say it's from last summer, it's gonna be looking at the PE based on the earnings that people thought were gonna play out, not necessarily whether those earnings ended up playing out. And a trailing PE is going to be more finite. So it's going to be based on the actual earnings data that occurred as opposed to someone's

guesstimate. Most years numbers start out way too high and are cut and people don't really factor that in when they're making those forward PE analysis. You use a lot of ratio charts. Why are those valuable to you? I like ratios because I do think, if we're looking at like small cap versus large cap, for example, we do a lot of that kind of work.

Which we will shortly. Because we're all making choices, right? And I think it's how one thing looks relative to the other. I do like to do a lot of absolute, sort of valuation charts as well, but I think you have to look at investing from multiple perspectives, right? So I spend a lot of time talking to portfolio managers

who are just picking US stocks. But at the same time, you might be, and they might have to live in the S&P bucket, right? Or a small cap bucket based on their investment philosophy. But you also will talk to multi-asset managers, right? We'll talk to global managers. I do have some ties to the retail world, through our wealth management

arm. And so some of those people are making choices between us and classes. They're saying, I'd rather be 5% heavier in this and 5% lighter in that. And a ratio chart would capture that preference. Exactly. And also, I think ratios do a decent job of helping you understand trends and where you are versus averages. And if something is moving up or moving down, I think that direction of travel is almost as important as the actual level that you're sitting at. Okay.

The biggest story of this year is something that you wrote about this week. And the timing is fortuitous because this is what Mike and I want to talk about. I think if we were to end the year right now, we would all say the predominant theme in the market was AI and the predominant trend in the market was mega cap versus large cap versus small cap in that order. This is what you wrote on mega cap performance. The most striking chart in this week's Pulse, to us at least, doesn't focus on the Fed, Europe, politics, or the consumer, at least

not directly. Rather, it could be found on page 6 and highlights how the biggest market cap names in the S&P 500 have continued to outperform the rest of the S&P 500 massively, despite the recent decline in 10-year treasury yields. With this recent move, the close positive correlation between the leadership of mega cap growth stocks and Ten-year yields that has been in place since the regional banking crisis in early 2023 Appears to be decoupling. So break that break that down for us. What are you showing us here? So if you look at the chart and this is really we started it in March

2023 right around the regional banking crisis because this is when the relationship emerged. If we had gone back, you know, What is that relationship? Ten-year yields go higher? Ten-year yields go higher and then the most, the biggest stocks by market cap. So here we looked at the top five and the top 10, they tend to outperform the rest of the market. So we looked at those on equal weighted, you know, on an equal weighted basis for both baskets. And so basically the idea is that when you came out of the regional banking crisis, 10-year treasury yields, what did that signal? I think it essentially signaled nervousness in the market.

And I think also it just signaled a lot of this coincided with the Fed conversation, right? Interest rates are going to be higher for longer. If you go back and you look at, I think we looked at net debt to EBITDA, I do a ton of charts, I think we actually looked at net debt to EBITDA as our balance sheet metric. And it was just really striking to me that if you, again, I think we looked at the top 10 as opposed to the top 5, but you really basically had no balance sheets in the top 10, right? I mean, you're getting these slightly negative numbers and the top 10, right? I mean, you're getting these slightly negative numbers.

And then you see the rest of the market, right? And you see a typical balance sheet chart for the S&P 500 over time, which it's elevated, it's off peak, a lot of it's long-term debt, so you don't need to panic. But what we really felt like was happening was that people were hiding out in safer balance sheets, both because of general economic nervousness,

which pushes people into secular growth stocks, but also it was just a balance sheet trade. And around the same time, remember, I'm an old small cap strategist, so I still talk a lot about that part of the market with people, there was just panic last summer about small cap balance sheets. And we were just screaming into the wind saying,

they're not as bad as feared, they've cleaned up their act, they're not as good as large, but they're not as bad as they've been in the past. Nobody wanted to hear it. It was just pure balance sheet panic. Right. So you have people crowd into Apple because Apple might have its issues with growth or whatever, but it's not going to have a problem with the Fed. Exactly. Okay.

Exactly. You're not in that chart, you're not suggesting that a higher 10 year or maybe you are, are you suggesting that a higher 10 year is driving people into these growth stocks? Because typically you would think higher rates are bad for growth stocks. Typically, right. And that's what's so interesting, right? Because if we had looked historically,

and if you look at sectors, so we do a lot of these sector correlation charts, normally higher 10 year treasury yields are going to be good for financials, which is going to be good for the value trade. And we had a chart showing value versus growth around 10 year yields, and it started to break down. So going back to our earlier conversation,

we spent a lot of time trying to understand. Why aren't the value stocks outperforming right with higher rates? Given the 10-year rate is rising. Right, because if you had done a 10, 20-year study, it would have told you to hold your nose and buy value. Hold your nose and buy financial. And that just would not have outperformed.

Well, financials over SPY is that multi-month. And that just would not have outperformed. Right. Financials over SPY is that multi-month lows as you know being a ratio person. Yeah. And I think the reason why is financials don't have that secular growth angle, right? If anything, they're sort of, you know, paroled in terms of longer term growth expectations. Well, actually, hold on. To be fair, anything over SPY is that multi-month lows. If you look at XLF over RSP, it's completely the opposite.

Which makes a little bit more sense, because in my mind, I'm like, wait a minute, financials have actually been doing okay. Using SPY as a denominator makes everything look like shit. Right, because again, it's all relative. So how much of this is investors being nervous versus just very simply, it's just the AI thing? I think it's a lot of different things, right?

And that's why I find so much value in talking to investors, right? Because I can go put a chart out there and listen to the portfolio managers tell me why they think it's happening. And so you do hear about sort of nervousness in the economy. It makes people want to own secular growth, right? So it kind of makes that AI theme

seem all that much more fundamentally appealing. Are you saying people are nervous about the economy right now, or they had been over the past six months? I think over the past six months, because if we go back to that chart, you're actually seeing recently 10-year treasury yields have started to come down a little bit,

and we're actually seeing the growth stocks continued outperform. So that's the decoupling. Right. So that's the decoupling. So we had a decoupling back in March of 2023, and now this trend that's been in place for a little over a year that seems to be driving everything

seems to be changing. And I'll be honest with you, I don't fully understand why that chart is breaking down. I could help you pull Nvidia and Apple out and it won't be breaking down. It's two stocks right now. And it seems unsustainable, quite frankly. I think your trend will come.

I think the couple, I think it'll be recoupled in short order. Unless you tell me Apple's going to five trillion and Nvidia's going to four trillion, five trillion, like by the end of this year, I feel like that's gonna recouple. Yeah, and I think we'll have to see, if we look at that top five and that top 10 basket,

your valuations are starting to hit ceilings that we've made, even in the post COVID era. We're starting to kind of bump up against a certain level that really we haven't been able to penetrate in the past. So let's do this next chart here, John outperformance of the top 10 names recently making higher highs. So this is that concept where the extreme can get more extreme. Yeah. And tell us, tell us what this this is a ratio. Tell us what we're looking at. So look, we're looking at performance and again we have equal weighted baskets

of the top 10 names and you know people wanted me to run this on the mag-7 and I said I'm not gonna run it for you on the mag-7 because the mag-7 today nobody cared about them 20 years ago. Right, it's a different... It's one of the top 10 period. They're always different stocks. That's a very good insight. Right, and that's, and you know, I will say I'm not a quant by training, right? But that is one thing that I truly believe is that when you're doing these historical charts,

you really do at least have to be honest with what you're looking at. And so I refuse to run these mag seven baskets for people. So, all right, so late 90s, you have the same phenomenon where the top 10 market caps are just leaving everything in the dust. And of course, nobody wants to hear that this is mirroring that because we know how that ended.

What are the top 10 stocks in 98, 99? I want to say like AOL, Time Warner, Cisco, Yahoo, Cisco, yeah. Or doing all that well. So I think you have a different quality component. So a lot of my clients, and I would say not so much anymore, but when we first started publishing this chart, they thought there was something inherently evil about concentration in the market,

that it's, you know, for telling this big top that everything has to fall apart. And look, I started in the business around 2000, so I can't, you know, tell you a lot about the late 90s, but I will tell you what I remember from that period. It was insane. They're just, it wasn't the same kind of earnings quality

that you have today. No earnings, no revenue. It's, no revenue. If you look at 2023 and you look at the MAG-7, Bloomberg does a great job crunching this data every week and you can look at actually the actual earnings growth from last year and the forward estimates for this year and last year the differential between the mag-7 and the rest of the market was about 40% okay you deserved

that out performance you deserved the premium multiple that you got. Yeah it didn't happen by accident. Right and that's very very different from that 2000 late 90s type period when you just didn't have the same you know kind of fundamental support. There was an article in the journal today. The headline was, NVIDIA's ascent to most valuable company has echoes of dot com boom. And Jim Cramer tweeted, I thought this was wise. He said, there's a serious piece in the journal this morning about Cisco versus NVIDIA

as peaks of internet bubbles. It's cogent. However, pretty much the whole way up, NVIDIA has been doubted. The Cisco comparison is fatuous though, because Cisco looked to be 40 times But turned out to be a hundred while Nvidia looked to be a hundred and turned out to be 10 times The estimates were way too high for Cisco and way too low for Nvidia No, I think that's it. He has that right. However chart back on please John It's never it's never great to see a ratio chart or anything because it take out the ratios just look at Nvidia It is quite literally going straight up.

Not today. Fine, fine. But when you have valuations like this, when it's just casually adding $100 billion every 30 minutes, it's unsettling. It is. And look, I'll tell you what's interesting. If I go back to that earnings growth data set

that Bloomberg puts out, if you look at the forward estimates, the gap, the advantage of that mag-7 basket is expected to shrink going forward. So still be pretty healthy this year, but actually in 2025, it's expected to shrink, I think it's around like maybe, I'd have to go back and try and think about like 2-3%, right? You've got the rest of the market recovering, you've got this MAG7 cohort decelerating pretty sharply and in 2025 those anticipated growth rates are expected to meet. So one, is that actually going to play out? I think that's an enormous question that the market has to confront but based on the data that is available now you're sitting at a premium valuation that is

very well earned but the rational basis for that is starting to dissipate. NVIDIA is selling for 39 times forward estimates, but expected to have 108% earnings growth calendar 24 and another 33% earnings growth calendar 25. What multiple should the stock sell at is the question. I don't know the answer, but like, should it not be 40 times? I don't know what the exact number should it not be 40 times should I don't know if I don't know what the exact number should be but Should you be able to continue taking that relative valuation up and up and up? So it feels to me like the direction of travel is probably down as a person universe in which Nvidia hits those earnings targets

And the stock doesn't go up anymore doesn't have to get killed But like how much can we keep rewarding the stock every't go up anymore, stock or you know the for compliance reasons. But what I will tell you is over the 20 plus years I've been in the industry, whenever you see big fat growth rates and you see them decelerate, the margin for error is just not there. Right. You just get so much indigestion. You get so much nervousness. Because here's what happens. People get very emotionally invested in the story alongside being financially invested. And then Nvidia reports an amazing quarter and the stock sells off. And it's like, well, I don't care if other people are selling it.

Look how great this quarter was. And they don't understand that the sentiment has turned and that no amount of growth will ever be good enough anymore. And if you look at the rest of the market now, we haven't talked, you know, we talked about how you're sort of hitting up against these peaks right on that kind of top 10 or top five bucket. If you look at the rest of the market, you're trading around like a 16 times P E, which is not quite average, but is pretty darn close to it and well below past peak. So if you think you can take the growth rates up there, they can get a little

bit more competitive with some of these higher multiple stocks. You've got a very favorable audience who thinks that's a very fair multiple. So I love that take. You're telling me I can buy S&P, X, Mag 7, 16 times earnings and I already know the next Fed move is a cut? I'm a buyer. The thing is, those stocks, they have a great month, they have a bad month, they have a great month, they have a bad month. And that drives people nuts if Apple and Nvidia are going to keep doing this.

And look, here's why I think this has been such a tough transition. Because our sort of take on this growth versus value or mega versus smaller debate has been the stage has been set for a transition, but there are some of those tailwinds for the transition have dissipated, and a few headwinds have emerged. So we think it's going to be sloppy. We think it's going to be tough. We think it's going to be messy. And the big problem is that if you look at GDP forecasts, they've kind of stalled out. So we're sitting at basically a 1.8% number for next year, which is well below trend. We're sitting around 2.4 for this year if

you look at consensus GDP forecasts. And your trend trend is about since the late 70s, you know, kind of 2.6 percent To really see value cyclical small cap outperform. You need GDP to be running hot. You need it to be running above average That's what you really need to see is more improvement on those GDP forecasts to get the earnings excitement And now the economic surprises are to the downside and GDP forecasts are falling. And so tell me the story for why I'm going to get that mythical small cap resurgence in that environment. It's hard.

I guess maybe rates coming down might be enough. I don't know. Well, you're not going to get it on valuation and of itself because if you look at the small cap space, you're basically very cheap relative to large. But if you look at the Russell 2000 on its own, it's sitting around 15 times. You're basically at average. So yeah, you can make evaluation argument,

but people who just trade in and out of small cap stocks, they're not seeing massive bargains right now. Well, but lower rates are a big part of the story now, because they have much more exposure to floating rates, their debt, than large caps. They do, but they've also cleaned up their acts a lot, relative to history. And I'll tell you, balance sheet data is tough

for any part of the market to pull from a data provider, it's particularly tough for small cap. From what we can tell, your weighted average maturities have actually come way down. And so again, it's not as, you're not gonna get as big of a pop as you might've gotten in the past.

If weights come down 100 basis points, it's not as meaningful as it used to be. Exactly, like it's still gonna help, don't get me wrong. But the other thing we see in the history of small cap relative to large cap performance and fed cuts, 100 basis points is not as meaningful as it used to be. Exactly. Like it's still going to help. Don't get me wrong. But the other thing we see in the history of small cap relative to large cap performance and Fed cuts, and I've been kind of screaming my head off about this with people for the last year or so, you don't see it pre-traded. It tends to happen after easing starts.

2003. On Wall Street, we want to pre-trade everything, and people tried to pre-trade this back in November and December. Then people got too optimistic about rates. We gave it all back. We're hitting new relative lows on small I want to put a pin in small cap for one second because I want to make sure we don't gloss over this S&P 500 Heavyweight champion chart. This is so cool. I'm from Todd so I've never seen this one Todd So I've never seen this before but what you're looking at is the largest stock in the market and the horse race as they trade positions and what struck me is that

After I mean, I'm just making this up by I but after the year 2000 Basically have three companies in the running until Nvidia just now and I feel like the horse race was probably more competitive prior Although this really only goes back to 1990, you had Exxon you had Philip Morris you had AT&T you had GE in the mix going back and forth now it's like Exxon Apple Exxon Apple. No the last decade it's only been Apple Microsoft until right Microsoft Apple for the last decade and now you have a third name you have Nvidia but I don't know like if you hadn't seen and now you have a third name, you have Nvidia. But I don't know, like if you hadn't seen this, would you have guessed that there was more variation in the largest market cap in the S&P or no?

So, you know, what I feel like, it doesn't surprise me in terms of the recent history. I don't really do these studies anymore, but we used to do a lot of studies on crowding and the most popular names and actively managed funds. One of the reasons I stopped doing that report was it was always the same names at the top of the list. And Goldman does it.

Yeah, and the VIP list. Right, other people do it. But what was interesting, right, is you would always see the same names, biggest dollar value, but the PMs are chronically underweight, right? They just can't keep up. And there are structural reasons, right,

that they can't necessarily even be equal weight, these specific names. When you look at fund surveys or fund allocation, is NVIDIA crowded? I haven't been doing those anymore. I will say, again, I can't get into individual names, but I did feel like last summer the camps on sort of the AI theme really cemented. There were really the believers and there were the skeptics.

They're still debtors. Right. And I don't think those two camps have really changed all that much. And I do think the believers have been rewarded. They've been rewarded, but I think they own what they can own. Yeah. Here's a quote from John Chambers in the article today, the former CEO of Cisco. He said, the implications in terms of the size of the market opportunity is that of

the internet and cloud computing combined. The speed of change is different. The size of the market opportunity is that of the internet and cloud computing combined. The speed of change is different, the size of the market is different, the stage when the most valuable company was reached is different. Oh, he's defending Nvidia's valuation. That's really interesting. For people that don't know, John Chambers

was the CEO of Cisco during that 2000 peak, and then for 10 years after until he said, this is no fun anymore. Josh and I have had this conversation in the past, like just hearing this, does it make sense that Nvidia is bigger than Berkshire and Google combined? So look, I will say with the AI theme, I think that we are in a very messy period

with it right now. Meaning? Meaning I think that it's a real theme. I think that we are in a very messy period with it right now. Meaning? Meaning, I think that it's a real theme. I think that we see lots of companies, and we see this through earnings call transcripts. We're reading what all the companies and the S&P are saying about their AI efforts. This is something that companies are really, they're focused on automation. They're focused on driving efficiencies. They're focused on these kinds of benefits.

There's a lot of work that's being done, but I think you saw really at the beginning of this last reporting season, a number of financial services companies came out and said, this is going to take some time to figure out. We had one company that we read in particular that said this isn't even a 2025 story, right? This is something that's gonna take much longer. Short them.

And well, but you know, they weren't alone, right? I mean, and it was largely, I would say, relegated to the financial services part of the market as you got kind of deeper in, then you started to see utility companies, right, come out and say, hey, we're gonna get a boost to power demand. Yeah, we're an AI play too.

Yeah, so you're seeing investors looking for those derivative plays, and that happened to be an undervalued part of the market at the time that conversation happened, and then it caught a bid. So it actually, you know, was kind of a healthy rotation in. But I do think this is going to take some time. I'm sorry, when you say this is a 2025 story, or when the CEOs say that, they're referring to like, they're answering analyst questions like when might we see earnings growth or

cost savings? I think it earnings growth or cost savings as a result of all this AI stuff that you're going to put into place. And of course, they're not going to be like, oh, next quarter, because of course not. And that's what we had been seeing at the beginning of this last reporting season, where all these tailwinds for rotation. And then you got kind of past that conversation and we saw more of the architects of AI, the companies that are helping those financial services companies, the enablers, right?

Oh, Accenture. Right, and so you're sort of seeing, you know, kind of the people who are actually doing the hard work and building the infrastructure saying, okay, yeah, this is gonna take time. And some of those were coming across better than others, right, but generally it kind of transitioned from, of transitioned from the beneficiaries, the cost savers, to the ones who are actually helping all the business customers.

Okay. One of the interesting things is you might simultaneously have companies say, okay, now we're saving a lot of money because of AI, just at the point where consumer confidence is tipping negative because all these white collar workers are being, you know, not replaced or laid off as a result of these procedures inside of companies that are obviating the need for as many workers. So it might actually not even end up being like a positive for the market on balance. Well, they're going to be puts and takes, I think.

Yeah. And I think that's the part of the evolution of that story that we're in right now, right? You've gone through the initial excitement, all the hopes and optimism, and now you're kind of back to reality, and some stuff is going to be hard, some stuff is going to be messy,

some stuff is going to work, and some stuff is not. And probably the end goal is going to be very beneficial for a lot of companies, maybe not necessarily in ways that were initially anticipated, but it's just going to take a little time to do the work. But I want gratification instantly.

All right. Put this Deutsche Bank chart up. Does this look right to you? You don't have to comment on Nvidia, but just any, let's say this were any stock. This is the market cap of Nvidia versus Germany, France, and the United Kingdom. Like any stock. Forget what stock it is. Does that seem like it should be a thing? Well, look, I will say if you think about, you know, sort of the US relative to the rest of the world.

No, but this is one stock. Right. This is one stock. Right. So, for the listener who's not looking at this, this is Nvidia's market cap of, what is it, three and a half trillion, supplanting Germany, France, and the United Kingdom. It's bigger than each one of those now. Generally when I talk to global PMs, right,

the US is the growth engine, right? You buy the US for growth, you buy Europe for value. Right, so I don't know, you know, it definitely is a striking chart. I don't know that it's telling me anything else that we haven't seen in all of those other concentration. It's just like, ah ha ha, that's interesting, there's no information in here.

Right, and look, I think, I mean, look, I think it's a very cool chart, but I'm not sure it's teaching me anything new that we didn't sort of see in those others. Yeah, maybe for me, stuff like this, it's just one of those things where I could picture us looking back at it in five years and laughing at ourselves. Maybe that's like, that's kind of what I see when I look at something like that.

So as we look at this next chart that you mentioned about the valuation of the top 10 versus the 490, do you think, has the bull market earned the benefit of the doubt that if, let's just assume that Nvidia doesn't add $200 billion every single day, let's just, maybe that just chills out a little bit. Can the rest of the market catch up? I think the rest of the market can catch up if the economic recovery continues.

And the reason I say that is what I see in this chart is something I feel like I've seen 20 times in my career is that we essentially, and we can get into this more later, but I think 2022 was essentially a near-miss recession. I think we basically had a recession. It didn't get called that. I think we had a fire drill that forestalled the recession because everybody prepared for it at once. If you look at consumer confidence,

it went to recession-type lows. If it went to the misery index, it went to recession-type highs. People felt as bad as a typical recession and the stock market fell the way it does. Silicon Valley had a recession. Venture valuations, the city of San Francisco, they literally had the equivalent

of what a recession feels like. And it was essentially a rolling earnings recession because you had the negative impacts to tech in 2022. And then if we looked again at the rest of the market, so the 493 XS and X the mag seven, I think you were down like 5% on earnings growth. Your chart is showing the PE ratio for the top 10 names is 27.7 and that's trailing. And that's that's actually a forward. That's forward. Okay. And and but what I think what

I see on this chart, right, is this is what happens coming off recessions, right, is that one thing in the market leads the way and it runs hotter and faster than everything else. Can you give us examples of that? So I think where you tend to see it a lot is when you see small caps coming off of a recession or cyclicals. So coming out of a 02 into 03,

you had small cap leadership? You did, I think you had it too. And biotechs and a lot of that led us out. Well, remember for a while, right, the growth stocks were going down and the value stocks were going up for a while. And so you tend sometimes to have these periods where something runs and kind of gets to a natural,

I want to say pause point. And then you have catch up trade. The problem is COVID killed so many things that indicated that we used to rely on in the past. For example, there was a housing and is a housing recession. If you look at mortgage applications or anything like that, there is no housing activity. But look at the homebuilders. They had an incredible run because nobody can move. There was only new construction. And so so many of the things that we thought we understood about the market were flipped upside down because of COVID.

No, I think that's true. I think the other thing that's happened, I mean, we saw this on one of our charts where we looked at consumer sentiment on the Michigan survey. And you can look at it against either S&P or Russell. But if you look at year over year pricing on the stock market, you've had these really weird correlations that have developed since 2021. So essentially, the stock market recovery is mirroring the sentiment recovery among consumers. And so I've talked a lot with people in meetings, but why did that happen? What changed?

I think one of the big things that changed. Everything. But also I think during COVID, right, everybody started building these high frequency data points. So, you know, castle back to work, you know, the swipes. Right, you know, at RBC, our digital intelligence strategist built these goal and goat indexes.

Everyone knows everything. Get out and travel. Right. So we're all consuming this like minute by minute data, daily data. We're all getting similar stuff. And so you're just, you're not as reliant, right, on these government reports, you know, that are coming out with the big flag. ISM. You know what else happened? Stocks became sports. Yeah. So all of the things that you thought should have happened in the stock market in 2021

or in 2020, you have to throw that all out because people were substituting football and basketball and college sports that they used to watch with stocks and crypto. So like none of those classic indicators were meaningful anymore either. It was the only game and was the only form of recreation for a hundred million people. The other thing that I think has happened is that if you look at, you know, what we call retail investors, right? If you think sort of like high net worth individuals, so not institutions, but I think that you've seen a dramatic change in that investment landscape over the last couple decades.

So when I started in strategy back in 2000, I remember my old boss sort of said, look at funds flows. Who did you work for at Citi? Marshall A. Cuff and then Tobias Lefkovich. Oh, Tobias was so great. He was amazing, I worked with him for like 10 years. Yeah, RIP Tobias, what a great guy.

He was amazing. Yeah, I agree. And, but you know. Did he invent the Citi Surprise Index, economics was that him? Tobias. What a great guy. He was amazing. Yeah, I agree. Did he invent the Citi Surprise Index? Economics? Was that him? I don't believe he invented it, at least not while I was with him, but he did have the Levkovic indicator, which when I worked for him was called Panic Euphoria.

I remember. Yeah, they've rebranded it now to be the Levkovic indicator. You know, I was a temp for Citigroup. I don't think we overlapped. Were you really? She doesn't remember. Can we do this NASDAQ below its 2021 valuation peak? Because I love this chart. Yeah, so Lori, I'd love to hear your take on this.

So what we're looking at is on the top pane. No, chart kid did. The NASDAQ 100 forward PE versus the NASDAQ 100 price. And of course, price is busting out to an all-time high, but the forward PE is still below where it was a couple of years ago, just barely.-time high, but the forward PE is still below where it was a couple years ago. Just barely. But do you think that the forward earnings estimates are going to be, are going to prove to be way too optimistic and that this is actually way higher than we think it is?

So, you know, I haven't done this on the Nasdaq 100, but when we've talked about that kind of mag-7, you know, kind of premium growth rate expectation, we've talked about what are the risks. And I said, you know, I've told people I feel like there are kind of equal risks, equal tail risks essentially on both sides. So my base case is that those earnings forecasts are probably in the right neighborhood. Maybe they're a little too optimistic. Maybe they're a little too pessimistic. I don't think you can really know at this point in time. We'll find out in 12 months. Right. But I do think the risks are probably equally balanced on both sides. The risks of what? The risks of earnings estimates not being hit?

Of those kind of high flying growth names that the estimates, I think you can probably assume that they're in the right neighborhood because the risk that they're overly optimistic or overly pessimistic, I think are pretty well balanced in my mind. So this is telling though, Michael, because what it's not doing is mimicking a mania. It's elevated, but it's not like P-E ratios have taken out a new record high to the extent that the stock prices have. So I think you could say that Nvidia feels like a mania, but it could also prove to be justified. Like, I'm more in this seems crazy camp,

but who knows? Crazier things have happened. Again, I think it's real but messy. Yeah. So one of the things that this bull market has done is just completely wiped out the bears. How could you be a short seller anymore right now? Gungeon from The Wall Street Journal

tweeted this chart from JP Morgan. The short interest on the SPY and the Q's are doing exactly what you think they would be doing. They're crashing to you. There's nobody left. There's nobody left. I don't know. What's this? Are you talking to anybody who is shorting stocks these days like where it's so Mike what's in this it's a short interest of SP wine

as a percentage of shares outstanding and it it's almost zero it used to be between like I don't know 10 and 15 percent call it and it's just crashing it's seven percent seven percent short interest is historically, but I don't know, what did this look like in 07? What did this look like in 99? I don't know. So, one of the charts, I will say, that the bears, and this was probably more popular last year, it doesn't come up that much in conversation this year,

but looking at an earnings yield gap chart, right? So, take your PE, forward PE, flip it, compare it to the bond yield. And you're not really seeing much of a, at like an earnings yield gap chart, right? So take your PE, forward PE, flip it, compare it to the bond yield. And you're not really seeing much of a, kind of a premium in equities at this point, right? You've kind of gone back to parity. So this was a popular call last year in the strategy world

that people are getting really, really bearish on equities because of that chart. But if you actually take the history back to the 1990s, you were kind of dancing around parity for most of that decade. Okay. The stocks did just fine. I wanna say the 1990s, you were kind of dancing around parity for most of that decade. But stocks did just fine. I want to say the average return, if you go back like the last 30 years,

looking at this chart, when you're kind of at parity between the earnings yield and the bond yields, your average return is like 12, 13%. That's really just another way of saying P-E ratio, but you're inverting it so you can compare it to something else. Right, so you can compare it to your anticipated return. That's like, should I be in fixed income or stocks?

Exactly. Am I getting enough of a benefit of the doubt in stocks? Exactly. And it's just sort of the idea of one asset class, right? If the bond market looks more intriguing, right, for a longer term investor, does that have to kill the equity trade? And the answer is no. So I didn't realize how much time you had spent in small cap

strategy. So now I'm really excited because this was the biggest question I wanted to ask you, having gone through a bunch of your stuff. Are small caps a waste of time for long term investors? Are they only useful when they're trending and when there's a tactical opportunity? Because 10 years ago, nobody would ask that question. Financial advisors were very big on factor investing and small cap premium is like part of the bedrock

of the way portfolios were constructed in wealth management. Obviously some very large popular asset managers of the day are not as popular anymore because the mean reversion refuses to mean revert. So here's my question. Why not just own large caps and count on the best small cap companies to someday join those large caps in the Russell 1000? I think what you tend to see if you sort of talk to people who watch the IPO market very closely

Yeah, and small cap PM Lin. I'll tell you this is a constant complaint that I get from my small cap clients They feel like all the interesting stuff is bypassing their market that they coming out 15 billion, right? It's coming out at a mid cap valuation or a smaller large cap valuation So they feel like the sort of supply of interesting stuff is starting to dry up. And if you look at like the Russell 2000 index, you've got a lot of REITs in there now. You've got a lot of biotechs.

You've got a lot of things that a lot of the sort of active managers who have a quality bias will tell you that they cannot own. And so that's another way that the opportunity set has shrunk. Now, I think that's happening at a time when you've also seen a lot of those flows get indexed to ETFs. And so that's had, I think, an impact on the industry. I feel like that's a part of the market that's shrunk. I've seen a lot of those portfolio managers shift over to things like ESG.

Or they go SMED. Right. And they go SMED. They rewrite their own rules and they just say, there's nothing here. But it has gotten to be sort of a tough part of the market. I will tell you there's still a lot of exciting stuff down there. And when I talk to small cap portfolio managers, they really take the idea of finding hidden gems, uncovering opportunities. I guess not from an asset management perspective though, from an asset allocation perspective.

Somebody tells you, you know, Lori, I'm going to build a long term portfolio of stocks and I'm not going to be sensitive to ups and downs. I'm just going to stick with it. Can you credibly make the case that they should be, you know, 40% like of the 60, should they be 40 large and 20 smid or just 60 large and the best of the smid will work their way up into your index eventually? That's the question. I think that you can still make a case for having exposure now whether you want that to be neutral, overweight, underweight, but I think the idea of kind of writing off the asset class doesn't make a lot of sense for longer-term investors. So I'll give you...

You think the small cap premium will someday return? I think there are two things that come up a lot. One is if you look at politics, right, and it kind of doesn't matter which party you think is necessarily going to win this fall, but there seems to be a commitment to de-globalization, to reinvesting into the domestic economy. Which should favor small cap industrials. Small, okay. Regional banks, even consumer companies, right? You can play that reindustrialization theme more through the smaller companies. And this is reversing a big theme

that we saw in the 2000s kind of pre-GFC where it was all global, global, global. So you're kind of reversing that big mega theme. I think the other thing is that if you look post-GFC, that's when small caps really struggled a lot. And what we saw in that period was constant fear of tipping into another recession and really weak economic growth. If you looked at GDP, right, the kind of average for that decade was much lower than what we'd

seen in the past. So if we're entering into a post COVID period where the economy is just going to run a little hotter and inflation is going to run a little bit hotter, and then we eventually get some interest rate relief, it does feel like you're setting up some macro tailwinds. Counterpoint though, in a bear market, I'm going to get killed in both. In a bull market, I don't know that I'll be rewarded for small caps, but I know, definitionally,

if it's a bull market, I'm going to get rewarded in large caps. You are, but it's a question of relative return. And we looked at that chart earlier, right, about kind of the 27 PE in the top 10 names versus 16 in the rest of the market. The Russell's trading around 15. So arguably, you're getting an even better bargain there.

I feel like this is recency talking. For the last decade, Josh is 100% right. There has been no reason to have anything other than mega cap growth. But these things are cyclical. And nothing is forever. And if you look at this chart, we're looking at the spread between the three-year rolling return of the S&P

and the rest of 2000, and coming out of the dot-com bust, small caps beat the shit out of large caps. They did so coming out of the GFC as well. And it's not to say that the next recession, they will lead us out. That's been the historic playbook. Who knows if it holds going forward. But everything has its day in the zone. Every asset class is cyclical, and I'm always of the mind of more diversification, not less, even if it's been really shitty for the last X years.

So I want to agree with that, but then I look at these alligator jaws opening wider and my question is, will the future definitely look like the past with this alteration that Michael describes or has something materially changed structurally, so maybe it's the IPO thing, where hey, it's just, you're going to have the better companies are going to be large caps, the best small caps will leave that index and join the large caps, and you're just not going to get a crop

of good enough small caps that they'll ever beat the giants. And look, you can throw out a third alternative here, right? Which is this chart, like most of the ones I run, frankly, is looking at S&P relative to Russell 2000, because that's how we've all been trained to look at large cap versus small cap. Small cap 600. The S&P 600 is coming up a lot more

in conversations recently. And if you look at quality metrics on the Russell 2000. The 600 have to be profitable. The Russell 2000 accepts anyone. Is it like 40% are negative earners? Something crazy? I think it's up there. I mean, it's basically, it's in the high 30s or the 40s.

So there's definitely an index skew. In the Russell 2, you're going to get lower quality because you have money losing companies. And just idiosyncratic stuff, right? Like if you look at the smaller cap biotech companies, there's just so much binary risk. And then REITs, I don't want to overplay that, but I just hear time and time again

from a lot of active managers, they're just chronically underweight. It's just not something, you know, there's even a big debate in small cap land should they be part of the index to begin with. They have their own S&P sector now. So. But that wasn't always true, but like that was a, you know.

Let's do this small caps undervalued versus large caps. So what we're looking at here is Russell 2000 relative to Russell 1000, which is large cap. This is market cap weighted. And this looks like it oscillates. Like it comes up and down and up and down. What's the big takeaway for you from this chart? So the one on the left-hand side is looking at a median.

It's a cap weighted median. If you use a cap weighted median, that allows you to get rid of some of the distortions from big outliers and that kind of thing. But you've been undervalued for quite some time. And so when we talk about this chart in meetings, we say, look, you've basically seen this since around like, I mean, this deep, deep valuation discount.

Right. And there's a floor, right? And so understanding where that floor is is helpful, but you can stay undervalued for quite some time, the way you did from kind of that 1990 to 2003 period. You could stay on the floor. Might not get worse, but it doesn't mean you're going to get a reversion.

Right, I do like the chart on the right-hand side where we started looking at an average, and we actually had seen in the summer of 2023, there was, if you looked at an average as opposed to a median, you didn't quite see the same disconnect. And so we've kind of taken away from that saying, don't just look at one valuation metric, try to look at a lot of different stuff.

This looks very mean reverting. Yeah, that's what I was thinking. Yeah, but it's not a trigger in and of itself, right? Like this is telling you they're ripe for rotation back in if the fundamentals cooperate. And here the fundamentals I think are the economy and the Fed. So Nvidia bears are gonna be I'm just bears I guess the only bears are Nvidia bears right now are gonna be pretty loud today because it closed 6% off its high had a pretty big reversal on pretty big volume. A lot of the big

growth stocks look like that today. So you see Chipotle down 6% not an AI. N nasty. Yeah, but guess what good. It's enough We can cool off and market could correct through time to price whatever Nobody should expect these stocks to keep going up 4% a day forever I guess what I would ask you is people are acting like now listen if the AI Air comes out of this market, and it brings down Microsoft and Google and Nvidia these have large weights And yes, they will impact the market. But there's been periods of time over the last decade where the Mag-7 trade has cooled off

and they handed the baton to the rest of the market and financials picked up. You saw energy in 2022. And energy, it's not impossible that these things have a normal pullback and the market doesn't completely unravel. Exactly, and that's where, you know, I've been sort of saying I have kind of a boring market call lately because I don't feel bearish

But I do feel neutral and you can see how the market could sort of trudge sideways right if you have that rotation You're aggressively neutral. I Think I described myself the other day saying I'm a tired bull and I the way I put it again I'm very quantitative. I'm just having a hard time making the math work for a higher target. How psychotically neutral? I think that with the S&P up 15% year-to-date, it would be awesome. It would be awesome if the market could just like chill out and go sideways. We just had an incredible run. Now that we get to choose where the markets go, but that would be wonderful. Can we look at this other divergence you pointed out? Earnings beats versus revenue beats.

Oh, I love this one. Okay. I want to know if you think there's some signal here. So you've got three charts that we pulled. Let's do in large cap, earnings per share beats tracking ahead of revenue beats. EPS beats are up, but revenue beats are down. So this is interesting to me. You could pull a lot of levers to affect what your report and earnings per share are.

A little bit harder to manipulate revenue. You either sold something you didn't. And I wonder if companies at this stage in the game, they can't pass on more cost to consumers. We know that that was a driving force behind the revenue growth of the last couple of years. Pepsi, Kellogg, everybody was doing it. Oh, this is 50 cents more, times a million customers. That's meaningful. If you can't play that game anymore and you've laid off everyone you're going to lay off, you still can find ways to screw around with earnings, but you can't manufacture sales

out of nowhere by doing that. So is that the message that you get from this? And let's just tell people, 78% of companies are beating on earnings per share but only 59% are beating on sales so far for Q1-24. And I think this was with one company left to report. So that's in the books. That seems to be a pretty wide disparity although we've seen it before. Now what?

So look, I think you hit the nail on the head. If you go back, I would say even to the trade war in 2018, we started seeing, you know, all these kind of like mini black swan events, right? That kept hitting corporate America. And they have done a fantastic job of working around whatever challenge you can throw at them. Trade war, COVID, supply chains, inflation, labor shortage.

What were they crying about in 2018? Like tariffs and currencies, right? Tariffs, tariffs were the big thing. Okay.. And you know what was interesting, I remember this really well because we had seen initially a big trade into small cap that summer, the US is going to be fine, rest of the world is going to have a recession. Then you came back after Labor Day and you got that next reporting season, it was kind of like conference season and all the companies were like, oh no, no, no, no, this is going to hurt us. But still they managed to come through it pretty well, but they talked down expectations.

We have another chart that actually looks at guidance and whether it's to the upside or the downside, and companies aren't giving a ton of guidance, but what they've been giving in recent quarters has been overwhelmingly to the downside. So they're keeping expectations in check. They're having a hard time beating on revenues, but they are still managing to beat on earnings because they're pulling every lever they can. But that's not great. It's not great, but I would have told you three years ago they weren't going to be able to keep it up.

Yeah, no, it's been magical. Right, and so I do agree with you. We've noticed the pricing conversation has gotten a lot squishier. There are still some companies that I think are out to lunch and think they can just keep jamming down these pricing increases through consumers. Well, if they're not listening to McDonald's and Starbucks, who else are you going to listen to?

If you're in the consumer world, that's your bellwether. The frequency of those purchases is literally daily. Do you think because so much of the economy, at least in the big indexes, relies on software, that companies are just able to move so much quicker than they had in the past and respond better to an impending recession or whatever? I think so. I mean, I think they've got just better and more tools to use than they had in the past. And I feel like you really started to see that emerge in that last kind of mid-cycle

slowdown we had 2015-2016. I feel like that was really when this became a big theme. And I remember at one of our conferences a few years back, it was a smaller company, and I just remember hearing the CFO talk, they had some special team that they had. It was a consumer company, and they were talking about this team, study whatever problem they wanted to put it on,

and they figured out how to reduce their cardboard and their packaging by X amount, and it saved this much on earnings. And I feel like you hear so many stories about that. So I think in addition to all these tools, I especially see this on the smaller companies, you just got a more professional management team and a C-suite that's just more dedicated

to sucking out costs everywhere they can possibly go. So no more bear markets ever again, I got it. So we're not gonna go off on this tangent, but this is one of the most fascinating subjects to me is that don't we think companies are learning from companies in the past and getting better therefore justifying higher multiples for stocks like the people running these companies now have a hundred years of Corporate history to pour over and figure out what didn't work and they don't make those mistakes. They make new ones But like we either believe that people are learning from the past or

they're not. And even just, I know we're exiting this period now, right? So this is going to be a tailwind that's being undone. But if you go back to the post-GFC pre-COVID period, we used to go to conferences, right? And you would hear investors just peppering companies on why they weren't loading up on short term, you know, on debt at these really, really low interest rates. And guess what? Companies listened and they went out and did that, and now they're still reaping the rewards

of that. So if you look at interest expense relative to sales or effective interest rates on corporate debt outstanding, very, very low relative to history. And they turned it out. Right. And so, yes, that is a tailwind that's going to be gradually undone and get a little bit, it's going to dissipate. But these charts are just absolutely staggering.

It's like looking at a ski slope to see the effective interest rate these companies are paying. Let's do this next one. Percent of S&P companies beating consensus, gap between EPS and sales. I know this is just another way of looking at what we just talked about. So anything else to say on this topic before we move on? Well, so I'm a trend person as opposed to a level person. So anything else to say on this topic before we move on? Well, so I'm a trend person as opposed to a level person. And when I look at this chart, I'm like, okay, this gap is not unusual. They go through these cycles and they're getting pretty close to the top of that range.

It's going to be harder to keep that 78% at 78% So the earnings beats will catch down to the revenue beats. Right and think about it this way the conversation we had a little while ago on pricing right a lot of that is how they're keeping that stat elevated and if your pricing power is eroding you're not going to be able to keep that up. Every time this happens you get a new fast and the furious movie. Where do you want to go? Do you want to do this iPhone stuff? Yeah I want to talk about this for a second. This is a great chart. Who tweeted it? Eric Soda tweeted this. Okay, from Bank of America. They surveyed iPhone owners and they showed that the iPhone ownership amongst every respondent is most concentrated in the 13, which is a few versions ago.

Yeah, we're on 15. You got a 13 too? Yeah, I've seen no reason to get the 14, the 15. So here it is. 77% of iPhone users have a model that will be 3 to 5 years old when the new upgrade cycle comes out. So this, I mean, is this big enough to move earnings estimates for the index? Certainly for Apple, maybe. So, you know, I don't know.

I mean, I know that if you look at- It's like 50% of Apple sales of the phone. Yeah, and look, I will say tech- If anything is, it's this. Tech is already one of the better sectors on the rate of upward revisions right now, right? And it's one of the stronger ones that we're seeing. So if I'm thinking about comparing it

versus other sectors, I'm not sure this is going to produce anything new. So has the market discounted Fed cuts and earnings per share growth? What could be, we know what the potential downside catalyst could be, right? That's easy to envision. What could be some potential upside surprises that drive the market higher? Upside surprises. So I think- GLP-1 pills.

I think 2025 GDP forecasts getting worked up. I mean, we're still sort of sitting at one point, I think I checked it today, it was at 1.8% on the consensus. Zero to 2% is terrible for stocks. Your typical performance is down in that kind of range. Oh wow, that's interesting. Two to 4% is where you typically start

to see healthy returns. And then better ranges than that, you tend to see good stock market returns. Negative GDP, you actually tend to see positive stock market returns negative GDP You actually tend to see stop positive stock market returns It's the Fed is doing crazy shit for us zero to two percent is economic purgatory We're constantly afraid of tipping into a recession and even though 2024 numbers have been ratcheted up I mean we saw just you're at 1 3 to start the year. You're around 2 4 now So you've seen it was point 6 last summer, right?

So we've just really you know moved a ton You haven't seen that same improvement on next year. I'll give you an upside catalyst and it's in the doc coincidentally. US mortgage rates declined below 7% last week for the first time since March, spurring back to back increases in financing applications for home purchases. This is Bloomberg. So every time the 30-year fixed mortgage drops below seven, the applications pop out. And if you were to get a sustained move lower in mortgage rates, I could argue for a housing cycle. And that's got bigger.

It's bigger than the... Maybe not for earnings, but for the economy. That's got a way bigger ripple effect into almost every industry. And what's really interesting about stock markets still to this day, way more heavily weighted toward goods than services. And when you turn houses over, you sell a lot of goods. What's interesting about this point that you make, Josh, is that over the last week or two, as rates have come down,

homebuilder stocks have been under pressure, now on the inverse of what we had just spoken about, with existing supply being unlocked, and companies like Home Depot, which I own, and Lowe's have actually started to perform better. It's interesting, the home builders have been this really mysterious trade, I would say, since 2022. I feel like they often get caught up

in the broader small cap cross currents. So, you know, I'd want to unpack that a little bit, but I do worry when I've just seen those synergies between the two parts of the market. We've got consumer sentiment that's still recovering, but just took a massive downside surprise, right? Like we've really got the consumer actually pushing back against inflation. So I think you're starting to get those worries. And I do think it, look, you're not seeing this expressed in S&P because it's a more defensive bucket. So the broader market is not reflecting this message. But I do think the smaller cap part of the market

is reflecting some angst over Fed policy. And I think that Fed meeting we had last week, it's just unbelievable to me how every time we get a Fed meeting, the market wants to take the most optimistic view on the path of monetary policy as opposed to listening to what the Fed actually says. So I wonder- Yeah, the market's calling bullshit on Powell. They say, we don't believe you. You're going to cut.

Right. And I think about my children, right? It's like you say something to your child and they just- Do they want mortgages? No, no. But just when you tell them they've got to do something or this is how it's going to be and they just say, no, no, no, no. you know when you tell them they've got to do something or this is how it's going to be and they just say no, no, no, no. Depends on who's kids.

Michael's kids listen to him. My kids do not. My kids are babies. I have one that listens and one that doesn't. Yeah. I mean your kids, you don't know if they're going to be listeners just yet. Yeah. But you'll find out soon.

Oh no, they're, I will tell you, they argue with me. I'm just teasing you. One other thing we got to get to and you don't have to weigh in heavily here if you don't want to, although please feel welcome to the biggest valuation for an RIA, our side of the business, that I can remember. I wanted to congratulate Ken Fisher. Ken has sold a big stake to private equity and the Abu Dhabi Investment Authority, which I guess is one of the sovereign wealth funds. His net worth is going to rise by seven billion dollars after

selling this minority stake in Fisher Investments, which is his RIA. It's one of the largest RIAs in the country. One of the oldest, one of the largest. That's a lot of money. He's going to join the, what is it? The Bloomberg 500 wealthy list right after the deal closes. I don't know if that's a sign of the times, but the RIA is going to be valued at 13 billion, which is a really big number, valuation number for any RIA.

Still smaller than GameStop. Still smaller than GameStop, but pretty substantial. And Ken's been at it for a long time. So I just wanted to make sure we addressed it and congratulated him and all the partners there. It's a pretty big deal. You guys talk a lot to RIAs or not so much? Not as much.

I spend most of my time with institutions, but the one thing that does come talk a lot to RIAs or not so much? Not as much. I spend most of my time with institutions. But the one thing that does come up a lot is sort of the kind of wealth, high net worth world. It's been professionalized, right? And I think about- Speak for yourself. You know I'm the CEO, right? I know.

I know. Do I look professionalized to you? Yes. Yes. She said yes. Yes. All right. I am a little bit.

No, but when I think about sort of the meme stock craze, right? Yes. Yes. Yes. Yes. I am a little bit. No, but when I think about the meme stock craze, and the way that part of the market is talked about now reminds me of how individual investors were described back in the early 2000s. I remember I was talking to an advisor at one of my clients actually a few years ago, and I think this was actually in 2022. We were talking about why you hadn't seen this big sort of exodus of retail flows. And I was, you know, mentioning that I had a trader I spoke with who thinks that is the tell.

You're not going to bottom in the market until you see the retail money come out via funds flows. I was talking to this advisor about it. She's like, we've trained our clients not to panic. They're smarter now. Right. I totally agree with that. You've made this point a lot on your blog. Yeah, Ben too. Yeah, we don't have as skittish of an investor population because they've been reading my blog for 12 years, Morgan Housel's blog for 10, Barry's for 20,

Michael, like, laugh if you want, but I'm like only half kidding. Millions of people are reading our messages now and our messages are, don't panic. Stop panicking and eventually I think it sinks in. I think it does. I mean, and I remember I was on vacation

and I think this was pre-COVID, but I was at the pool, kids were in the pool, ended up talking to a dad. We were watching our kids swim around together and somehow we got to talking about the stock market. And this was not an investment professional at all and started asking me questions about the Russell 2000 and longer term. You must have loved that.

Yeah, but it was a sophisticated conversation. And it really just struck me. I think that was probably the first time I really started thinking about it, just how much the investment community has really changed on the individual side. So just to put a cap on this, I gave a talk at the NASDAQ last week and the gist of my talk was the difference between boomers, millennials, and Gen Z. I left my generation out, Gen X, because just leave us alone. We don't want any part of this. But millennials are not risk takers, but they're sophisticated. They learned, they don't panic.

They don't log into, um, betterment and sell themselves out every time the VIX spike, they just don't do that. Um, Gen Z is risk taking. Gen Z looks at markets like a video game that they can beat or a puzzle that they can solve. It's a very different mentality from the millennials. They actually want the risk. They embrace it.

So much so, they film videos of themselves losing money for the likes. It's a whole, whole, whole different. So not only do they not panic, they're increasingly bolder and embracing volatility and trying to find out how they can make it work for them that's a new thing that's nothing like previous generations of investors and I had a lot of data on that and I was I was terrific all right

Laurie Calisean ladies first of all thank you so much for doing this was this fun I had a blast you knew you would though right I did okay well you you really are you really are amazing we We loved all your charts. We'd love to have you come back. Would you be interested in coming back on the show? Sure, of course. Are you busy tomorrow? Yes.

All right, we always end the show with favorites and we just try to give the audience some idea of like what you're reading, what you're watching, good vacation you've taken, like really anything. What do you think people should hear about? So I was on a short trip to celebrate the end of school at a water park the last few days, I won't say who, but I was impressed that when we checked into the hotel. Great Wolf?

Yes. Everything was automated. We didn't have to talk to a single human being to check in. It was the most, you know, sort of easy process. I wish all my business trips were like that. But no, I think, what are we watching? I mean, there's lots of Bluey going on in my house right now. A lot of Bluey. I got that. I never did the Great Wolf thing. Was it fun? It was fun. Is that the kind of place where you could just let the kids roam but not, I mean, you have very little kids, maybe not, but the kids just go off on their own or you're with them the whole time? You know, we're with ours the whole time, but I think what's nice about having the water park

on site with the hotel and you know, the bowling alley and all this other stuff is you can go do stuff for an hour and then go chill out in the room, and then you can just sort of do what you want and go back and forth and you have happier kids that way. Okay, have you done that yet? I never heard of it.

You never heard of Great Wolf? Uh-uh. It's like a combination hotel waterpark, but it's indoors, you can go in December. Oh, very cool. It was a little hot for me, actually. It was a little too warm, but. Yeah, well parents need a break.

Yeah. So, all right, shout out to Great Wolf. What do you got for us? House of the Dragon, what a show. Oh, all right, you took mine, but say more. I mean, I have no idea who's who, but I love it. You watch Game of Thrones, House of the Dragon? I have no time for television.

You're just all bluey? That's all you got? All bluey. I watched True Detective last week. Which one? The new one? The new one. I didn't get to the final episode yet, though. Oh, let me spoil it. It's the top. No, no, no. It is. They all are. That's an eerie show, right? Yeah.

Alright. We love that show. Did you watch... Have you seen Hacks show, right? Yeah. Alright, we love that show. Did you watch... Have you seen Hacks on Netflix yet? No. No, HBO. It's HBO? I'm sorry, Max. Did you watch it?

Uh-uh. I think it's from me. Show's a home run. Yeah, people love it. You like stand-up comedy. Yeah. You like shows about... You like drama about stand-up comics.

I did love Crashing. You ever see Crashing? Yes. Yeah. This is a really good show. The actress's name is Jean Smart. She's in her 70s on the show. If you watch Designing Women growing up, like you grew up with this...

I grew up in Alabama, so I definitely saw Designing Women. She's amazing. She's going to win an Emmy for sure. I don't know the young comic's name, but basically it's like a situation where she has a residency in Vegas but she's not funny anymore and she gets paired up with like a 25 year old you know stand-up comedy or a comedic writer and of course they're nothing alike it's a young girl and they don't understand each other but you can imagine where it goes from there but it's very very well well done. I think that's probably the only show that I'm watching right now that my wife's watching. So we finally got one together, which is not easy to do.

Anyway, all right. That's it from us this week. Again, I want to thank Lori Cavasina. I want people to listen to your podcast. Tell us the name of it. It's called RBC's Markets in Motion. You have to type in the RBC. Okay. RBC's Markets in Motion. You have to type in the RBC. Okay.

RBC's Markets in Motion. How often are you going live? Usually about once a week. Okay. Max, too. Okay. And will you be booking Michael Batnick? Of course.

Of course. All right. And you're on LinkedIn. You're just your name, Lori-Calvasina. Just Lori Calvasina. Yeah. Just look for Lori on LinkedIn. How often are you publishing there? Maybe once a week.

Okay, that's enough, right? Yeah. So not that much to say. We have big decks and then, you know, so we... Alright, you do an awesome job. I like how RBC is social media forward. I like that they're letting you pod. I think that's super cool. And thank you so much for coming on and educating us and our audience, we had the best time.

Thank you. It was a blast. Thank you. All right, ladies and gentlemen, that's it from us this week. Thanks to John, Duncan, Rob, Nicole, Daniel, Sean, Chart Kid Matt. Did we get everybody?

Man, the team is strong. Thank you guys, we'll see you soon. I have a picture of Larry David. You have the picture of Larry David? Up above. I'm the... I did this for you, son of a bitch. You didn't notice it. Look at that picture.