The Compound and Friends - The Next Big Test for Stocks | WAYT

Episode Date: July 11, 2023

Join Downtown Josh Brown (CEO, Ritholtz Wealth Management) and Michael Batnick (Managing Partner, Ritholtz Wealth Management) for another episode of What Are Your Thoughts and see what they have to say about the biggest topics in investing and finance! On this episode they discuss: inflation, consumer sentiment, IPOs, big tech dominance, and much more! Thanks to Public for sponsoring this episode! Visit https://public.com/compound for more information on how to earn 5+% interest with a treasury account on public. 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. Wealthcast Media, 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

Welcome to the compound and friends today's episode and all new edition of what are your thoughts with myself downtown josh brown and my co host michael batnick we get into a lot of stuff about earnings on this particular episode. third consecutive quarter of year-over-year negative earnings. Last quarter, the earnings expectations were low, but U.S. companies found levers to pull. They exceeded those expectations, and the stock market proceeded to go on a rampage to the upside. I don't know that that will definitely be the case this time, but we preview some of the stuff that you're just going to want to be aware of as these reports start to come out at the end of this week. We also look at the IPO market. We look at a whole bunch of fun stuff. Hope you guys enjoy it.

Thanks so much for listening. And with that, I'll have my engineer, John, take it away. Thanks for listening to What Are Your Thoughts? I'll have my engineer, John, take it away. decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. All right, gangsters, let me see who's in the chat tonight. Michael Skyros is here. MD is here. Jay Luther. Roger's here. Sean is here. The whole gang. We love when you guys come out for the live. Thank you.

Bob Sacamano, how are you, my friend? Midwest Cooking is here. Midwest Cannabis? Yeah, Midwest Cannabis. All right. Hey, guys. It's another all-new episode of What Are Your Thoughts? The best investing show live on YouTube where we don't do home alone faces in the thumbnails to trick people into watching.

You guys are coming to this show every week. A lot of you guys are coming live. We know that you guys know how hard we work to make sure that the time we all spend together is informationally nutritious. I'm here with my co-host as usual, Michael Batnick. Michael, say hello to the people. Hello. Hello. Is that your real handle on Mastodon? Yep. Is it? It's popping off. Are you active on Mastodon? No, I don't Mastodon. I Mastodon't. Okay. Good for you. All right. Let's do, we have a sponsor tonight. Let's talk about public.

Tell people what's going on. So money market funds yield like 4.6, which is phenomenal, not complaining. Six-month treasuries, higher. What is it now? Five and a half? And did you know that the market is now expecting the Fed to unpause? I'm sorry. Yeah, unpause. Unpause. Going again.

Okay. So could we conceivably see a six-month treasury rate close to 6% at some point this year, this calendar year? It's close right now. It's close right now. I buy treasuries on the public app. I've got money in motion, money in transfer. It's six months, so I'm in the hire for longer camp. So we'll see. It's pretty easy.

I just send money from my bank, which is paying me nothing. Thanks, Chase. I send it to my public app. It's as easy as sending a Venmo. And within seconds, the transaction is done. And I'm earning 5.5%. So if you guys haven't checked out public, look at the link below the show.

Okay, action packed tonight. It's a very big week. Busy show. It's a busy show. Let's get into the first thing, which is inflation. It's Tuesday night as we're taping this and tomorrow morning, we're going to get CPI for the month of June.

Investors are currently- Wait, Josh, wait, wait wait sorry to cut you off hang tight didn't you want to show something i mean i'm in the dark i'm looking at it it says image pulled ready to show oh john can you can you put this up i got a little treat for michael this i thought this is i thought this is pretty good this professor galloway calls uhreads the Spite app. I love it. It's perfect. He's got Larry David in front of his Spite store, the coffee shop. Mocha Joe's.

Next to Mocha Joe's. Yeah, I love it. Shout out Professor Galloway. Pretty good thread. Okay, let's get into inflation. So according to the CMA, investors are pricing at a 93% chance that the Fed raises rates this month, which will be toward the end of July, and a 40% chance of at least two more quarter of a point rate hikes. Wall Street economists are looking for 3.1% June inflation when CPI comes out on Wednesday. June inflation when CPI comes out on Wednesday. That is a slowdown from the 4% rise we got in May.

May's data was actually the slowest year-over-year inflation reading since April of 21. So if you look at this month over month, the consensus expectation is for 0.3. I saw Goldman come out with something today to that effect as well. Can I ask a question? Yeah. So last time they hiked, was that May? May, right? I'm sorry, when they paused, when they announced that they were pausing, that was May. That was the May meeting. So they said that they were going to wait and see because these rate hikes impact the economy with a lag. Since then, inflation continues to come down. What changed in the last 60 days? I think the labor report.

I think the labor report. It's still showing job growth. And while it's true that the pace of wage increases is slowing, it's still rock solid. But why is a strong labor market and a decently strong economy with inflation cooling a bad thing? Well, look, these expectations that I gave you are as of the Friday, which is when we got- And change every day. And they change every day. And change every day. But this is the June jobs report. What else would... Look, if there was a huge miss in the jobs number, maybe that would have kept them in place. But there was a decent miss. Non-farm payrolls missed for the first time in 15 months. But I think I'm more talking about wages. On a core basis, CPI is forecast to rise 5% over last year in June. But again, that's a slowdown from 5.3%, which is what we saw in May.

So look, I think that we're going to get a low three handle on inflation, just my best guess. And that seems to be where everyone else's best guess is also. I want to put this up, though. Wait, hang on. One more thing. Not to belabor the point, but didn't they say that the Fed has never stopped hiking until the Fed funds rate got above inflation? And we're well above. We are well above. Well above. But not on a year-over-year basis, Michael.

What do you mean? I just quoted to you that core CPI was 5.3% last month. So now we're at 5.5 Fed funds rate. So is that well above? Five, five and a quarter. Okay. So I guess, would they call that parity? John, put this up, please.

This is core personal consumption expenditures price index. This is the PCE that the Fed is said to pay more attention to than CPI. And what you can see here is that the housing component is coming down fairly quickly. And of course, it's still elevated. Nobody's saying it's a great situation, but it is absolutely coming down. And I think this is from the journal. Quote, the cost of shelter in the CPI was up nearly 8% in May from a year earlier, but a measure of national rents maintained by apartment list was unchanged from a year ago in June, which is down from year over year increases of 14% in June of 2022. So flat versus 14% is a big drop in the rate of inflation in housing. And I think that that's, you know, we talk about the lag effect. It's not just a lag effect in inflation. It's a lag effect in the way inflation is being measured. And so if you go by current

apartment rental prices, if you were to look at the last few months, you would not conclude that there's a major shelter inflation problem. But again, the Fed is looking at a lagging data series and they're waiting a year's worth of data. And it's maybe not the best approach when you're getting to the tail end of a hiking cycle. Michael, what are your thoughts? Yeah, I don't know. It seems like not quite an asset liability mismatch, but it seems like they're measuring things in a funky manner. We're seeing more evidence that inflation is coming down. Used vehicles, which was a hot, hot, hot part of inflation. Yep. Second largest price decline ever.

They fell 10.3%. And they're now in the largest drawdown ever, which is kind of interesting. This is from Lizanne Saunders. Wait, let me see this. So this is the Mannheim US used vehicle value index. So this is just the prices that used cars are selling for. That looks like a pretty steep drop. Huge. Biggest on record going back to 1997. You saw China's CPI came in flat. Obviously,

globally, China is a huge driver of global prices. Yeah. So there you go. It seems to be trending in the right direction. Global surprise, inflation surprise index. I mean, crashing, no really other way to put it. Yeah, look at this. And this is around the world. Yeah. So what this is, is the upside surprises in inflation that were freaking everyone out for the last year are now going away. And they're actually undershooting the expectations for the first time pretty much everywhere but the US. But US looks like it's trending in that direction. If I'm Jerome Powell, I don't know that I would spike the football

and say my work is done. But I don't know why he would also raise rates as well. Today, we learned that the share of US small firms raising prices fell to the lowest level since 2021. Another pretty big driver of inflation, which is small businesses drive the economy. Deflationary online goods. John, please, thank you. Online prices have fallen for 10 consecutive months. So wages are still rising. Yeah, there's still places where inflation is rearing its ugly head, but all in all, pretty good.

And interestingly, the options market is expecting a minimal reaction from the stock market. The options market is from the Wall Street Journal is pricing in a 0.6% move for the S&P 500 on Wednesday. That's the smallest expected move around inflation this year. But have the, oh, I guess, yeah, I guess inflation, CPI days, I think, have been more volatile than FOMC days. I think I saw that somewhere sometime during the first half of this year. And I forget over what length of time they were talking about.

But CPI days became more important than Fed meeting days because of how much work the Fed has done to basically tell us what they're about to do. So it's really been the variability in the inflation data itself that's moved the market. But so they're saying they're not looking for a big move in the S&P. Um, I don't think that they're going looking for a big move in the S&P. I don't think that they're going to get a big move in the rates market either. Because I feel like almost no matter what the inflation number is, if it's 2.9 or 3.6, there's a hike either way. What do you think about that? I would be surprised if there's an upside surprise to inflation.

No, I'm saying if there were, do you think that would have a huge impact in the interest rate market? I don't think it would because I think everyone just knows there's a hike coming. Well, the market is saying that. I mean, look at what interest rates have gone over the last couple of weeks. Anyway, Nick Tamareus' article in the journal, basically, the last mile of the inflation fight will be the hardest. I'm not 100% sure I agree with that. I think it was much tougher during those months back-to-back where they were doing 75 basis point hikes. I don't think those were easy decisions. I feel like this tail end, like, do we do another 25 or maybe not? Those don't seem terribly consequential to me. Like, I don't think

they're make or break. So, but I mean, that's his take. He follows the Fed for a living. I just, I feel like those were harder. Moving on, Josh, remember the regional bank crisis? Here's Lisa Bromwich's today. There is one clear conclusion from the first half of 2023. March's regional bank crisis did not become an economic crisis as much of Wall Street expected and feared. It didn't materially seem to slow growth or appetite for risk assets. No one even talks much about regional banks these days. True.

When's the last time they were in the headlines? How many, if you could quantify, how many dollars approximately did the US public lose as a result of the three banks that went out of business this March? How much did the US public lose? Yeah. What would you guess? Meaning what exactly? I mean, if their deposit's $0 in terms of equity. $0. No, in terms of equity, yeah. If you were a shareholder, you got wiped out. All right. Not many people are shareholders in SVB. So the bottom line is nobody lost any money. The banks lost money.

Like the banks that were affected lost money. And equity shareholders and bondholders. The big banks that actually matter to the stock market gained as a result of that crisis. So there were no victims of that crisis other than the shareholders of these three, probably fairly under owned, narrowly owned banks. And that's why there was no impact on the consumer. CJP Morgan today? Yeah. 52 week high. That being said, US consumer borrowing did slow to more than two year low in May,

reflecting the first decline in non-revolving credit since the onset of the pandemic. A lot of this was driven by cars, which is a good thing. Total credit rose $7.2 billion, the smallest advance since November. So not exactly a credit crunch, but borrowing did decline for sure. Next chart, please. On top is consumer credit. And on the bottom, you see the red line, which is non-revolving, which is basically the yellow is credit cards. So the one that's crashing is things like mortgages and student loan payments, obviously, offices in there and car payments. The thing that I was worried about during the banking crisis is that there was going to be this larger retrenchment in lending to Main Street businesses.

You were worried about a liquidity crunch? 100%. I said the big risk is not that these three banks go down. It's that the next three or 400 regional banks that are worried about the same issue curtail how much lending they do to commercial borrowers, to individual borrowers. I always felt like that was a real risk. And we somehow got through it by, I guess, quarantining these three or four banks that were in trouble. A couple of them were able to raise capital. A couple of them had to get closed out and we got through it. But I do think that that was the big risk at the time. All right. Look at the charts of these companies that are totally exposed to the US consumer.

Capital One looks pretty good. Discover Financial, all US consumer credit risk. Visa, close to an all-time high. MasterCard, beasting. So the consumer's okay, and the consumer drives the economy. Those stock prices would not be doing that if there were any real concerns about their loan portfolios. Well, now in the case of Visa and MasterCard, they actually don't make loans. Capital One and Discover are absolutely on the hook for the people to whom they've issued credit cards. And you just would not be seeing this kind of action if there were no concerns.

One company that does not look like these four is Ally, which is definitely more exposed to the auto market. So maybe there's something brewing there. Yeah. But this is – again, this is one of those things like can we see it? Like can we just see it happen before we panic about it? We're not really seeing a meaningful uptick in delinquencies past 30 days. And until you see that, I really don't know what there is to talk about. So I agree with you. The consumer is okay. And they're spending. And we know that. And we're going to talk about

consumer discretionary later in tonight's show. But we're about to find out definitively how okay the consumer is. Okay. No, it's at a 52-week high today as well. The IPO ETF. Yeah. Let's get into this. John, pop this chart. This is from Renaissance. Renaissance is probably the best research shop on the street covering the IPO market. And they are the sponsor of the IPO ETF, which tracks recently public companies.

This is their research from this week. In the second quarter of 2023, 23 IPOs raised a combined $6.6 billion. The deal count held steady from the prior year period, but quarterly proceeds, so the money that these companies raised by going public, was the highest in six quarters, even without the spinoff, the IPO spinoff from J&J, which was a $3.8 billion deal that went off without a hitch. There were nine IPOs in the second quarter that raised $100 million or more. There was a pickup in June. And the Kava restaurant chain was probably the big standout deal that most people are aware of. Stock's doing well?

Stock is holding up. It was not a pump and dump. What else did I want to say about this? Oh, this quarter's IPOs averaged a modest 3% loss, weighed down by several poor performing micro caps, though the $100 million plus deals delivered a strong 20% return from the offer. And the Renaissance IPO index is actually, I think, outperforming the S&P in the second quarter this year. Do I have that right? I can double check, but it's been on fire. So that would not surprise me. It's been pretty hot lately. Anyway, all right. So I think it's up 32% year to date, which obviously is not as good as the NASDAQ, but better than the S&P. So again, the deal count is low, but proceeds are jumping.

Nine companies raised $100 million or more. If you pull out the micro-cap, shitty companies that went public, you got a 20% gain for the bigger ones. Josh, actually, as of today, the IPO ETF is up 38.5% year to date. It is outperforming the NASDAQ 100. Wow. All right. Had a monster day today. So deals are back. And I think that's why you could have a JP Morgan, for example, hitting a new 52-week high. Interestingly, though, hitting a new 52-week high. Interestingly, though, Morgan and Goldman still look kind of trashy. Do they? Yeah, they don't look great at all.

You wouldn't buy either one of them? Nope. Okay. All right, let's keep moving. What do you got? All right, I know this is a big theme, but hey, we go where the market takes us, big tech dominance. This is Gunjan Banerjee via Bank of America. All right. Only 23% of stocks outperformed the S&P in May, the lowest of any month in our data history since 1986. You know who this really

matters for? Stock pickers. Effectively, if you are not at least equal weight, which is, if you're a stock selector, it's basically- Large cap fund manager. This hurts. It's impossible. It's impossible to be equal weight those names. What do you get a 40% of your portfolio in these names? But interestingly, this was May. And what does this mean for forward returns? Well, what did the market do in June? Now I know it's only 30 days, but June was the best month for the S&P since October 2022. We talked about this as being a catch up for the rest of the stocks in the market, rather than a situation where the bull market was ending and there were only a few stocks left still going up and they were about to reverse. And guess what?

Even though mega cap tech is on fire and a lot of the value names aren't, so is equal weight tech. John, chart on, please. The equal weight tech is up. What do you want? And this is actually, this is from yesterday. So what's it up now? Up 22% year to date. Is that so bad? 22%. All right. So you're looking at the triple Qs are up 38%. The equal weight tech index is up like 21, 22%. I understand negative divergences. That's not what this is. These are both up substantially

in the first six months of the year. This is not a divergence that's worthy of anyone's attention, quite frankly. And I know this is a point that JC's made a million times. The time to pay attention to this is when most stocks have stopped going up and are going down, and it's only a few keeping the market up. That's not this. That's not this. Next chart, please. Also, this trend has been in place for a decade. This is the Qs. I'm sorry. This is the equal weight divided by the Qs. If you were inverse, it would be going up. But the point is that this has been in motion for a decade. It's nothing new. It would be going up.

But the point is that this has been in motion for a decade. It's nothing new. Larger technology stocks have been outperforming average-sized technology stocks since 2013. Yeah, I agree. What's this bad breadth usually mean reverts chart? I don't think we did this. Where are we? I don't have this.

Oh, I think you did put this up. This was Gunjin's share of this. Oh, yeah, yeah. Okay. What is this saying? This is just the percentage of stocks outperforming the S&P? Yeah, I mean, this is pretty wild. It's wild. There's not a lot of stocks outperforming the S&P.

We agree. And you know which ones are. You know all the names. Well, let's do this. Jonathan Farrow tweet real quick. All right. Uh, this is Barclays. We raise our 2023 price target for the S and P to 41 50 from 37 25, which by the way, where are we right now? I think this is below where we are. Uh, yeah. We, yeah. S and P is at 4,400. Um, we think equities would remain range bound to the year end. I do not see the tech centric rally broadening to the rest of S&P. Okay. I mean, the data suggests that he's

imminently about to be wrong, the Barclays guy. That's literally what's going on. The equal weight looks mean. Looks like it's about to break out. The Dow as well, hanging super high. So tomorrow's a big day. But if stocks go higher, they're going higher. You heard it here first. So we got, so with the dominance of these giant tech stocks, we got news from the NASDAQ 100 index about, they didn't call it this, I'm calling this an emergency rebalance. And these are rare.

The NASDAQ 100, just for people, just so people understand, it is market cap weighted, but it's modified market cap weighted. They don't just like set and forget and let the stocks do whatever they want forever. They will make changes. Let me read this. This is from IBD. The NASDAQ 100 special rebalance will take place before the market open on Monday, July 24th to address over-concentration in the index by redistributing the weights. The NASDAQ has only conducted a special rebalance twice in its history, in December 1998 and May 2011. The seven largest companies in the NASDAQ 100 account for 55% of the index.

This combined weighting will be reduced. It's also likely there may be notable relative weighting shifts within these seven giants. So I just want to run through how big they've gotten in the index to prompt the NASDAQ to decide they have to step in and make an adjustment. Microsoft now is 12.9% of the NASDAQ 100. Apple, 12.5%. Google, 7.4% weighting between their two share classes that are publicly traded. Nvidia is now 7% of the NASDAQ 100. It's a slightly larger weight than Amazon, which is 6.9%.

And these are both obviously now trillion dollar market cap companies, Tesla and Meta round out the top seven. One is four and a half percent. One is 4.3%. And just for reference for the entire NASDAQ composite chart off, please. Apple stock had an 11.4% waiting as of July 7th, while Microsoft was at 9.5. So the NASDAQ composite is the whole universe of NASDAQ traded stocks, not just the top 100.

This is Wells Fargo's analyst, I think his name is Chris Harvey, commenting on what might happen here. The upcoming index rebalance is reducing concentration risk, but creating Uber cap selling pressure. And we saw all these stocks down on this news. Creating what? Creating what? He calls these Uber caps, like mega cap, but Uber cap, because they're so big. With Uber caps overbought, near-term liquidity demands will likely weigh on the group in 2011 when they did this rebalance last the names that were downsized ended up lagging by two to three percent between

the announcement and the event the event is next week i don't think anybody cares um let's see 2023's rebalance is driven by tesla's week ago rally causing the constituents all right doesn't matter but uh we're living through really interesting times. I asked Sean to make this chart. This is the big seven stocks market cap percentage growth. And we're going back. I don't know. Is this three years ish?

Okay. So look, NVIDIA market cap is up 304%. Tesla is up 200%. Apple's up 80IA market cap is up 304%. Tesla's up 200%. Apple's up 80% market cap. You know, this is the kind of thing where if you're going to have an index, at a certain point, you have to decide where the line is. You have to draw the line. As of July 10th, chart off.

Wait, not true. What do you mean? That's not true at all. The S&P 500 doesn't have to decide anything. They're pure market cap weighted. I think the S&P 500, though, has more sector diversification than the NASDAQ does, which could lead to even more concentration. In July of 2020, the market cap of these seven stocks was $7.1 trillion. Today, it's $10.8 trillion combined. $7.1 trillion. Today, it's $10.8 combined. So they added $3.7 trillion cumulatively,

or 52% growth. So they're big. They keep getting bigger. I don't know. What are your thoughts? Is the NASDAQ doing the responsible thing here? I don't really have thoughts, to be honest. And my real thought is I'm getting bored, and I imagine the audience is getting bored too. We're making, no, no, no, we're making too many numbers. Let's move on. Okay. You think it's not going to matter that much in the end? Well, what did you just say the last time this happened, they lagged by two to 3%. What are we talking about here? Who cares? Yeah. They're big stocks. So, so let it be. If you were the index provider, you would say, leave it alone. We'll see what happens. If I was the index provider, I'd probably short them. Let's, uh, let's have some fun. What do you mean? I don't, let's go. Let's move on. Next topic.

That's a great take. Okay. What are we doing next? Uh, second quarter earnings start on Thursday. Are you scared? Yes, I do. Uh, I, well, the stock market has, had an incredible run, as we've been discussing. So expectations for the stocks are strong. However, analyst expectations are pretty weak. So I guess I wouldn't be too surprised if you get a scenario where estimates are better than analysts are expecting and stocks struggle. I don't know. We'll see. Yeah. I like the setup. This is Sam Stovall, who's the chief investment strategist for CFRA. Quote, rarely can you injure yourself falling out of a basement window.

Adding the only way investors really can be surprised is if earnings come in better than expected. Like the risk is to the upside. Let's pop this chart. This is showing S&P 500 quarterly earnings that change from a year ago. The current estimate is that second quarter S&P 500 earnings will be down 7.2% versus the same quarter last year. This would be the third consecutive quarter where earnings have fallen year over year. You can go chart off. Here's a thought. This is interesting. Investing is hard. So three potential consecutive quarters of year over year earnings per share decline with the Fed aggressively raising rates. Stocks went up all three quarters. With regional banks blow ups. And the S&P is 7% off its all-time high. Shit is hard.

I think it's worth digging into the why. Why are earnings expected to be down 7.2%? It turns out- Is it from inflation? It's cooling? It turns out it's pretty much all energy. The oil companies are facing difficult comps versus last year when the price of energy was skyrocketing all throughout 2022. They were posting record earnings, and now we're lapping that quarter, and the comps are tougher. The consumer discretionary companies are going to report the highest year-over-year growth in earnings this quarter.

The estimate – are you ready for this? It's 27% with Amazon being the biggest contributor. That's fact-set data. The energy sector is going to post the biggest profit decline, again, compared to that booming period of time from last year. Well, that's a good point. That's a good point. We talk about the S&P 500 as if it's one name. Obviously, it's 500 names with many different sectors.

You mentioned the consumer discretionary names are going to be a talent. Gangbusters. Gangbusters. So this was, I don't know, last quarter we were discussing Home Depot. Big gap down after earnings, right? Peak renovation was behind us. Guess what the stock did last week? Closed the gap.

Yeah, how about that? The energy stocks are going to see earnings drop 48.3% from last year. There are not a lot of sectors where that's something that you would see. That's very much a commodity kind of boom bust sector. You're not going to see many other sectors have that big of a swing. But that's where the down 7.2% comes from. What happens when you strip that out? Do you have that? When you strip that out, it's much better. All right, here's Savita Subramanian from her earnings preview. I think she put this out this morning. S&P 500 second quarter consensus

was cut by only 2% since March. That's half of the typical preseason 4% cut. And again, it's energy. So we're looking for the S&P to earn 5.88 a share, and that would be negative 8% year over year. But she thinks that we're going to see upside surprises, and these are her reasons. based on her database, we've just had the highest, the best upside surprise quarter since the third quarter of 2020 coming out of the pandemic, meaning every economic data point was surprising to the upside. Number two, we've had the highest ratio of positive to negative corporate guidance since 2021. Number three, improving corporate sentiment. Seven of 11 sectors are going to see better year over year earnings growth this quarter versus Q1 and S and P X energy earnings will be flat. You said that's the answer to your question. So she's looking for a 3% beat and she's thinking that this is the quarter where we're actually

troughing in earnings expectations. So we have a couple of charts. Love a good trough. We do these quickly. I love a good trough too. This is Q2 earnings per share has been cut by 2% in the last three months. And on average, you see double that going into a quarter. It's the first quarter with a smaller cut in a year now. So in other words, for this particular quarter, the estimates have been coming down for a quarter. It's the first quarter with a smaller cut in a year now. So in other words, for this particular quarter, the estimates have been coming down for a year and they really didn't come down that much. And I think that's a testament to all of the upside surprises that we've seen in the economy. Next chart. Energy drove the entire downward revision since March. You see this? I see it. All right. Next chart.

Again, seven of 11 sectors are going to see earnings growth improving this quarter versus the first quarter of the year. And it's the sectors with the biggest stocks, communication services. So that's what Netflix, Meta, et cetera, consumer discretionary, that's Amazon, right? Like you're seeing it where it really matters. You know what's important about this? All right. Try back on please. So look at Q1, 2022. Yep. That was not a good time and earnings were great. Why? Guidance. And so you see Q4, first quarter stocks are rallying the entire way. So I think what companies have to say is going to be very, first quarter, stocks are rallying the entire way. So I think what companies have to say is going to be very, very important, probably more important than the numbers.

Are you saying the guidance is going to matter? The guidance matters. Look at this chart from our friends, Nick and Jessica from Datatrack. More S&P companies have pre-released positive earnings than at any point since the post-pandemic bull market. This suggests a good financial reporting season, which starts later this week. So we've got the banks on Friday. Wait, this is positive pre-announcements versus negative? Yep. So positive is the, what did they say, highest?

It's been the highest in a while. Looks like it's the highest in two years or so? Since, I guess. Oh, three? Yeah. Since 21. It's a long time. So there we go.

There we go. All right. Oh, I wanted to do this thing on the macro data. I want to revisit this really quickly. John, put up that next chart. This is back to Savita. The macro environment in the second quarter was much stronger than expected. Despite the banking scare in March, the economy proved more resilient with incoming macro

data topping consensus expectations by the biggest margin since the third quarter of 2020. And that's why she thinks we're at a 12. So what you're looking at here is the economic surprise index. And she thinks that's pointing to a big 8% earnings per share beat this quarter based on this historical relationship. She's tracking the economic surprise index versus the aggregate earnings per share beat for the overall market. And I mean, it doesn't line up perfectly, but it's interesting. So we're going to get JP Morgan, BlackRock, Delta,

Pepsi, Citigroup, Wells Fargo, all in the last two days of this week. Which one are you looking the most forward to or most concerned about? Wait, which one's JP Morgan? BlackRock. I always like to see what BlackRock's doing just to see what investors are up to. Delta just did their big investor day last week and they gave guidance. I don't think there's anything going on there. Remember we said, I guess two weeks ago, the strongest stocks don't let you get in.

Yeah. Have you seen Delta? Yeah. Forget it. Straight up. Yeah. No shot. Keep waiting for a pull seen Delta? Yeah, forget it. Straight up. Yeah, no shot. Keep waiting for a pullback. You're not getting it. All right. All right.

All right. I want to talk about Walmart, which is turning itself into a tech giant. Here's a quote from a portfolio manager at Neuberger Berman. Walmart has really separated itself

from the omni-channel perspective without giving up an inch of ground on the value it offers consumers. It has future-proofed its business. Ooh. Like it. I like that quote. Like that quote. Throw this chart, please. Josh, did you know that Walmart has outperformed handily Amazon over the last five years? You know what? I would have guessed this. I would have guessed this. But this is a big outperformance this is 96 versus 46 for amazon

over five years that's pretty impressive they're flying drones now like they're delivering eggs with drones what else they have to do to actually become a tech giant they have to they have to they need a streaming tv service they have one that's common it Walmart TV? They need a show with Jason Bateman. I know that's like part of the thing. I know we've heard this before. It's just mind blowing. 90% of Americans live within 10 miles of a Walmart store. Wait.

90% of the country lives within 10 miles of a Walmart. So they've grown their e-commerce business 122% since 2020, reaching $53 billion of sales. It's 13% of the company's total. And here's a point I want to make. Every company is going to, in some way, transform itself or at least blur the lines between what is a tech company, especially with AI coming down the pike. Yeah. it's a good point. I guarantee you Walmart outspends many of the companies that are considered tech stocks by the index committee. I guarantee you, right? Like if you just think about the logistics

and what's required to do e-commerce at the scale that Walmart's doing it. So they're all blurring and they all have to use tech to deliver what they deliver. I think that's what I want. All right. Enough of that. I'm going to make the case for a company that was one of the best performing stocks of the 2010s. Wait, Duncan's saying I'm frozen. Am I frozen? You are frozen, but it's okay. We got your back.

All right. I'm going to close out. I'm going to go ahead and close out a few tabs. Josh, we're going to talk about probably a company you don't care for, but a category that is near and dear to your chest. We're talking about Domino's Pizza. Let's run through some charts here just to give you a little flavor of how big the global pizza industry is. So it's $120 billion industry. QSR stands for quick service restaurants. So like Papa John's, Caesars, that sort of stuff,

which actually dominates the market. It's like, what's that? Two thirds. Yeah. Most people don't live within, you know, 50, 50 miles of a, of a decent pizza place. So this is what they have to rely on. Next chart, please. So it's a wildly global company. Twice as many stores outside the United States as inside. There are dominoes all over the world. I mean, I knew that, but I didn't realize to that extent.

There are 13,000 dominoes all over the world. And in their investor presentation, there's tons of growth potential in emerging markets, China specifically. All right, next chart, please. They have a 22% market share of total pizza, which is kind of wild. Again, I'm sorry, QSR pizza. And a 31% slice of the pie of delivery. How about that? Yeah, it's a big deal. That's actually pie of delivery. How about that? Yeah, it's a big deal. That's actually what they do.

They do that better than, they do delivery better than anyone. Like the app, they're just, they're great at it. Next chart, please. So this is estimate, this is average US franchise store EBITDA. Next chart, please. We're just gonna run through this.

Global store count exploding, growing an annual 6.6%. Great. Operating income also exploding. I didn't show earnings per share, but it's the same chart. Actually, even more impressive. And as I was saying, this being one of the best stocks of the 2010s. Next chart, please. So Netflix outperformed it barely. We've got Domino's in orange, Apple up 1,000%, Microsoft at 550, Google up 330, and Domino's 4,000%. The stock's up 4,000% in how, what is this, 15 years? This is 2010 to 2020. Okay.

So I got an opportunity to get into the stock. Just you? You got an invitation to join the shareholders? I bought the stock two weeks ago. It had its largest drawdown of the last decade. Why? They had a 2020, I guess, a pandemic hangover. The comps were ridiculous. That's what I was going to say.

The comps were ridiculous. They missed top and bottom line. They guided lower. And the stock got crushed. But I'm in it. And this is not a trade. I am going to be a Domino's shareholder. So the stock is in a 30%, 40% drawdown.

I agree with you. There was no way that 2022 was going to live up to 2020 and 2021 because people have choices again. They're not sitting there at home ordering on their apps. I feel like to me, pizza is like the luxury market, only in the sense that it's up and to the right. Like there are no bear markets for pizza. When was the last time you ate Domino's? Actually, funny you ask, I had it in Minnesota and it was horrendous.

Not only was it horrendous, but it took like two hours. But it was their playoff weekend. There was nothing open. But yeah, it sucked. The food, it was not good. So that sounds really bullish. So you're like the anti-Peter Lynch. If you hate the product, you go along the stock.

No, I had a bad experience, but I do like Domino's. I haven't had it in years, but I'm bullish. You know what? I'm an eater. My kids grew up eating at some of the best pizzerias in arguably in the world, and they still like Domino's. Like it just, I don't fully understand it or maybe what they like about it is the reliability. No, it's just like, it's comfort food.

You know exactly what you're getting. It's always there. Yeah, that's what I mean. So. All right. I have a mystery chart for you, Mike. You want to play? Let's do it.

All right. Please help me out with the clues. John, You want to play? Let's do it. All right. Please help me out with the clues. John, chart on, please. Don't be stingy. Don't be stingy. Okay. These are three different index ETFs, all of which represent the same country stock market. Which country are these ETFs?

which country are these ETFs? And by the way, these stocks are in the midst of a runaway rally. The index itself and the ETFs are breaking out into a new 52-week high and getting close to an all-time high. What country are these ETFs representing? I'm aggressively cycling through countries. Oh, wow. Look at that. You're representing? I'm aggressively cycling through countries. Oh, wow. Look at that. You're cheating?

I'm cheating. Italy and Spain look really good. It's not Italy and Spain because I don't even think there are three ETFs for those countries. No, but this is not the UK, is it? Is it? It is not. Want to take one more guess? I want you to get it.

I want you to get it. I want to get it too. It's been in the news lately. It's too. It's been in the news lately. It's a country that's been in the news lately. A country that's been in... Gosh dang it. Hold on. Give me one second.

The metaverse. I don't know. What is it? I mean, we're on a live thing here. All right. You got me. It's not the metaverse. Okay.

Oh, you sound so disappointed. So these are three different ETFs that represent India. Oh, you sound so disappointed. So these are three different ETFs that represent India. The orange one is the iShares India 50 INDY. It's got about $600 million in it. And that's like the top 50 stocks in India, basically. It's almost like a triple Q's. These look great. Yeah, this looks amazing, right? The purple is the iShares MSCI India ETF, which covers the total market. And that has an AUM of about 5.13 billion.

So that's like basically just by the India stock market. The blue one, which I am personally most interested in, is the Wisdom Tree India Earnings ETF. And that's got about a billion bucks in it. It's been around forever. Sorry, red flag. Sorry. Yellow card. You can't say billion and bucks in the same sentence. Just go on. A billion dollars in it. And I like that because it's a smart beta. And the factor that they're selecting for is profitability. So it might miss the upside of like some Indian startup company or whatever goes public, like of course.

But these are companies that are profitable, earning money, and being weighted based on how profitable they are or how fast they're going profits or whatever. So that's the wisdom tree way of doing it. And obviously that's trailed because it's been a really great bull market, but it doesn't mean it'll trail forever. But anyways, my point is this. If you add up the AUM in those three ETFs, this is not an area that US investors have really gotten excited about. But did you know that according to Goldman Sachs, India will overtake the United States to become the world's second largest economy by 2075. What? I'm just saying. You know, I give you clues that are specific, and you just say it's a country that's been in the news.

All right. No, it's been in the news because Modi is feeling himself. Modi played both sides of the Russia-Ukraine conflict. Sir, I'm sorry, but nobody's asking for this. Okay, fine. Anyway, this is, I think, the second most populous country on earth, or maybe it's bigger than China now. populous country on earth, or maybe it's bigger than China now. It's got a roaring stock market. It's got a hot economy and it benefits from inflation falling because I think they are a net importer of commodities and oil. Most importantly, wonderful food, huge Indian food. I never eat it, but I love it. Yeah. I'm not that big on that. Okay. Anyway, I'm sorry. You couldn't guess. I did my best. You know what we need?

We need a Domino's for Indian food. Uh, there might be like one of those, there might be one of those chains in the mall food court. That's an Indian food chain. I'm not, I'm not a hundred percent sure. What's your favorite? What's your favorite Indian dish? I like the chicken. Which, which one?

I like it all. Masala. I like it all. I even like the Trader Joe's Indian food. All right. Hey, guys. Duncan's playing us off. He's playing us off.

All right. Hey, guys. We want to say thank you so much for joining us here on The Compound for another all-new edition of What Are Your Thoughts? Make sure you like, make sure you favorite, and subscribe, and leave reviews, and tell your friends. This week, all-new Animal Spirits tomorrow morning with Michael and Ben. Ben is doing an all new edition of Ask the Compound on Thursday live on YouTube. So get your questions ready. And then at the end of the week, another very special guest.

We're very excited about this episode of the Compound and Friends. You will hear it Friday morning and see it on YouTube Friday afternoon thanks so much guys everybody have a great night good night