The Compound and Friends - What if It’s Still Early? With Denise Chisholm

Episode Date: May 29, 2026

On episode 244 of The Compound and Friends, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Downtown Josh Brown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ are joined by Denise Chisholm to discuss: whether AI capex is a bubble, why stocks keep climbing despite persistent skepticism, and how earnings growth is broadening beyond the Mag 7. They discuss semiconductors, margins, inflation, Fed policy, mega-IPOs, and more! This episode is sponsored by Franklin Templeton. Learn more at  https://www.franklintempleton.com/munis. Sign up for The Compound Newsletter and never miss out: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠thecompoundnews.com/subscribe⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Instagram: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠instagram.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠twitter.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ 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/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Franklin Templeton Disclosure: Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. You can find this and other information in each prospectus, or summary prospectus, if available, at franklintempleton.com. Please read it carefully. All investments involve risk, including possible loss of principal.  Franklin Distributors, LLC. Member FINRA/SIPC. Learn more about your ad choices. Visit megaphone.fm/adchoices

I saw a reel from Neil deGrasse Tyson on these being the closest thing we have to aliens. They have like nine hearts, a couple of brains. I did not know that. Well, that part I knew. I remember that. Each one of their tentacles can see, feel, touch, smell, taste. I don't eat. I don't eat octopus.

Okay, you don't? But I eat calamari, I eat squid. Okay. I don't know why I draw the distinction. It's not that big. I saw a documentary about how intelligent octopi are. Yep. And I could use of plural there.

So the problem is we go to like, we go to chema. We go to like all these like Mediterranean restaurants and everybody gets the grilled octopus. Yeah. You know, I used to like it a lot. But now you feel bad. That's why I'm wasting away. Denise, here's where I'm at.

Tell me. I don't know if this is my age or my personality. I'm now at a stage where I eat out of the restaurant and I have no patience for the bringing of the check routine. Like, you have to flag somebody down. They come over. I'd like the check. They will be right back.

They go and get it. Then they come. They leave it there. Then you have to sit with it for five minutes. Yes. Please come back. Then you put your credit card in and you're looking around for somebody. I'll give it to a bus boy.

I don't give a shit. This is why you own toast. Hold on. And then, and then they'll come take it. And then that's a mystery. Where do they go? Because the thing that they dial it into is always by the kitchen.

Yep. Fine. I see it. Then they come back. Then I have to look at it and pretend that I'm looking at it. And then signing the tip. So when the toast thing came along, okay. I loved it.

Yeah. And I'm, I own shares of poster stock. But like, can I have a check? Yes, here it is right here. I have the control. I just want to press a button. Literally the last forkful. I want to drop the fork and walk out of the restaurant.

Now, I don't know if that's me, like my age. Did you ever achieve that? This is Josh's softer side. This is how he connects with the audience. No, it's really bad. The point I was trying to make is I used to have a lot more, it's not tolerance, patients. I just want to, when I finish something, I want to be on to the next thing and the lingering is what? Was it an S&L skit with the doctor and the old man that you have EOG?

What is EOJ? Early onset grumpiness. Did you have a... He has a diagnosed. Can I get rid of it? No, there's no way you can get rid of it. Why would I not concur? But isn't it better for the, isn't it better for the server, for the restaurant owner?

All right. So as a former waiter, I was a waiter for years, full time. Why does it take so long? Because you, sir, are not the only customer. But why do we have to do this dance? What dance? I just want to, it's 2026. I just want to put my fork down, put the napkin on the table, and walk.

No, but all it's usually, like, it's 50-50 if they bring you a toast. What if I just give them my credit card on the way in? Just stay home. Yeah. All right, problem to solve. Order takeout. Super Ease. Problems solved.

I hadn't thought of that. I hadn't thought of it. Are you in New York frequently? Do you come here often? Not that frequently. No. No. Well, everyone here is just like me.

So, no, I'm not really normally like this. Yeah. So we know you can't do individual stocks. We can. So we'll do the talking. You do the talking. Yeah. So I know you can't confirm it.

deny, but it's public now. It's public. This just happened before we came on here. Anthropic. Series H. Where we go? Where is this? Series H. They're raising $65 billion at $965 billion plus money. The round is being led by Altimeter Capital, Draganeer, Green Oaks, and Sequoia. And listen to his participating. Basically, everybody. Capital Group, CO2, D1 Capital Partners, GIC, iconic, yeah, and Taylor, too. X-N, AMP, PBC, Bally Gifford, Blackstone, Brookfield, D.E. Shaw, DST Global, Fidelity Management and Research Company, General Catalyst, Insightly Partners, Jane Street Partners. I'm like halfway done. I'll stop reading, but. Holy shit. With that amount of money, you need everybody. Basically. 65 billion. It's like the last Avengers, right? Like, everybody's got to show up for

this. You're trying to, you're trying to do $2 trillion, maybe three trillion dollar IPOs inside of a six-month window. You need all the Avengers. So, I don't know. Are we potting? Yeah. All right. We're ready. Are you nervous about the IPOs? We're going to talk about it. Not the ones that Fidelity's invested in. There we go. I have an ungood authority. Hey, Nicole's, look at this. John's on the... I'm so disoriented. Whoa, whoa, whoa. Stop the clock. Here's a from our sponsor. Quick trivia question.

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Franklin Distributors LLC member FINRA SIPC. 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 Riddholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Riddholt's wealth management may maintain positions in the securities discussed in this podcast. Oh my God. Ladies and gentlemen, welcome to the very finest investing podcast in the world. I'm your host, downtown Josh Brown.

If this is your first time joining us, man, are you in for a treat? Or I apologize. I'm not sure. To my left, my co-host, co-creator of the show, all-around good guy, Mr. Michael. Good name. Hello, hello. That's it. That's all we got.

Thank you. Thank you. All right. They're far too kind. Our special guest, returning champion, she crushed it on the show the first time we were in Boston. Is that right? That's right. All right.

Denise Chisholm is Director of Quantitative Market Strategy within the Quantitative Research and Investment's Division at Fidelity Investments. Denise focuses on historical analysis and its application and diversified portfolio strategies using factors. Oh, they like the factors, Denise. Good. Sectors. Yeah, that's better. Yeah, I like sectors too. And themes.

Denise joined Fidelity in 1999. Her research informs the views of roughly 150 managers overseeing more than 450 mutual funds and ETFs. Thank you so much. Yeah. Thanks for having me. Thanks for having me back. Question one.

Where will the S&P 500 finish 2026? No idea. Don't give spot estimates. Fair enough. Higher or lower is... I think that's a good bet. Yeah. Uh, Goldman Sachs joined the S&P 8,000 chorus this week.

I want to read their rationale. Do tell. And get your response. All of this checks out with me. So, all right, earnings growth powered by the AI boom will drive further gains in stocks. Okay. I think we're all experiencing that right now. We would all agree.

Uh, Goldman is going to 8,000 from 7600. Quote, continued earnings growth should drive continued equity market upside. the increased return forecast reflects increased estimates for S&P earnings following an exceptionally strong first quarter reporting season. I also would point out their earnings per share forecast would equate to 24% year-over-year growth this year, and they're bumping up 27 to 13% growth. The argument is there's a lot of beneficiaries of artificial intelligence infrastructure investment in the S&P.

maybe that was underappreciated in January, and we've all woken up to this. Last thing, the combination of decelerating earnings growth and continued uncertainty around both AI and the macroeconomic outlook should prevent a major increase in valuations. So they're saying not a bubble. The governor is there's still this uncertainty about AI.

So the infrastructure powers the earnings, but the multiple stays in check because people are a little bit nervous about what is it all going to mean. Does that sound roughly in line with what you expect? Yeah, well, I think that there's a lot of data that supports what they said and then an addition to that, which is to say that it is becoming more diffuse. It is becoming more broad in terms of the recovery. And you can measure it a bunch of different ways.

And I think the interesting part about cap-x cycles is that you can measure them historically. I mean, post the financial crisis, a lot of investors complained about the fact that corporate America wasn't spending. right, and that the earnings was fake-ish in the sense that it was driven by buybacks and dividends, and it wasn't real earnings. So you can measure it historically. Now we're starting to complain, I would say, or to be concerned about CAPX. But CAPX is usually the better path, right? So if you say CAPX relative to sales is on an upward trajectory, and let's call that a CAPX recovery,

and you could call the opposite something that's not, you would rather, as an investor, from a stock market perspective, from an earnings perspective, from a GDP perspective, and from a job perspective, rather have a CAPEX recovery. That CAPEX recovery on the high end is definitely driven by CAPEX seen in technology stocks, but it's getting more diffuse. So all of the sectors now, of the 11 gig sectors, we have the data going back in history. You can measure it CAPEX relative to sales. They're all accelerating.

And not to such a degree that we saw in any kind of bubble. I mean, at the bubble time, when you measure it, especially relative to free cash flow, at the peak of the bubble in 2000, corporate America, in aggregate, was spending, three and a half to four times their free cash flow at the time. We are still under one in terms of free cash flow, even with... Outside of the hyperscalers. Even in addition to them, like so in the aggregate. So yes, outside them, we're not really anywhere in that bubble territory.

So when people say they're spending all their free cash flow, you say so what? So I say that's six or seven companies over the last six or seven years, but it's not systemic. So there's idiosyncratic, right? And then there's systemic. And again, when you idiosyncratically focus on a couple of companies, you could fall prey to the fact that, you know, we'll see. Will the CAPX estimates come to fruition? Will the free cash flow not be there? Or will revenues actually grow, you know, in addition to what you think?

Or maybe they'll figure out other ways to generate free cash flow, which we've seen in the past. But you're not seeing that for the aggregate of the technology index. So they've grown free cash flow above CAPX for the better part of 20 years. So the recent hookup is still, we're still from an aggregate sector perspective, under spending in terms of CAPEX relative to free cash flow. Why do you think people have so much trouble accepting a CAPX wave and not automatically going to, well, it surely must be a bubble because the numbers are going up from last year. Therefore, it's some sort of a mania. Like, why can't people just accept not every wave of CAPX spending automatically turns into a pumpkin? Well, don't you think maybe it's just because that's what we lived through,

meaning that there hasn't been a CAPEX cycle in so long. We only remember the last one and it turned out badly. Correct. Okay. Correct. Have there been examples of CAPX bubbles that didn't result in a stock market crash? CapEx bubbles. CapEx waves, sorry, that didn't become bubbles and result in a crash.

Oh, for sure. I'd say, like, again, back to that sort of data, if you say CAPX recovery is when you're spending cap-x relative to your sales base. And the opposite, most cap-x cycles actually generate growth rather than create a bubble that deters it. So, I mean, if you think about it just in the basic, like the virtuous cycle of the U.S. economy, when corporate America sees growth and spends for growth, they create growth by spending, creating jobs.

So it's in some ways that it reflects the durability of the cycle. Can we go back to something that you said? This, I think is a really key point. Michael and I have been around long enough that we were probably maybe not doing this show, but doing blogs or whatever during this period of time where a lot of the earnings per share growth was coming as a consequence of float shrink, where companies were being rewarded by shareholders for not spending on R&D, CAPX, M&A, and just like running their businesses, buying back stock, and those would be the top performers in the market or among the top

performers. And that was like good enough. But you had a lot of critics railing that it's a, it's a bubble because it's all being driven by buybacks. And once the buyback stop, it'll all come crashing down. And actually what ended up happening was not that. The buyback stopped because there became an urgency for investment. And then all of a sudden, the stock market stopped punishing people for CapEx and started rewarding and getting more bullish. Yes. and buying the stocks of companies that were making these investments. And now it's a lot of the same critics, and now they've changed their tune. The buybacks are over, but they still hate the market.

And now the reason they hate the market is because they're not doing buybacks. They're so busy investing. What are they making all these investments for it? So there's a component to the market where they will just dislike a rally, and you can come up with the reason after it almost doesn't matter. Do you feel that there's some of that in the air? Oh, absolutely. Do you want to name any names?

Do anyone that you want to call out? No, I would call anybody out. Yeah. But you think that's a real thing? Well, I think the most interesting part is I think that most investors, and I think, you know, for people who study history, this is the exception, but most investors want the equity to market to reflect good times and good diffuse times, meaning that not just a few companies are spending, but many companies are spending.

There is good growth. There is good job growth. But when you study history, the equity market doesn't always reflect good times. times. In fact, if you had to say, if you dropped a quon onto it and I'm kind of a quant, and you said, is the equity market reflective of good times or is that a hedge against bad times? You'd almost say that it's more often the hedge against bad times. I mean, think of all the things that have gone wrong over the last five years, and the equity market is, you know, 70% higher. So this is the trick, I think, of investing that when you study history, like,

you understand all the risks, all the headline, like all the problems that can go wrong. And your downside risk is, well, what if they don't go wrong in the way. that you think that they will, then you give up on average returns of 8% a year, right? Which is one of the few asset classes that can actually keep pace with inflation. So I think that's the, that's the tug of the, you know, riddle with equity investing. I think there are investors also who politically are just on the other side of the administration. And that's, you know, perfectly fine. They'll have their time in the sun someday, too, we assume, like it goes back and forth.

Oh, it always goes back and forth. But there are people that when they don't like the direction the country seems to be headed in, they don't like who's in the White House or they disagree with the way like certain things are happening in the culture, it's like a cognitive dissonance that they almost can't bear. They can't process. Why is the stock market higher? Isn't A so bad and B so bad and C so bad? This surely this is wrong because I don't feel good right now about.

what I'm seeing. But the problem is the data. I don't think anyone's like fully immune to that. Hence the need for quantitative. Okay. I think that that's what's helpful, right? If you say like consumer confidence is at all time lows, like, is that a problem? And you go, well, wait a minute.

You'd actually be rather be buying equities when consumer confidence is low relative to high. I stopped paying attention to that a long time ago. Right? I mean, but same thing with uncertainty. Like we got this with tariffs originally, you know, last year when people were like, and I had a lot of diversified portfolio managers come to me and say, Denise is a very uncertain environment.

In an uncertain environment, corporate America is not going to spend. If they don't spend, jobs aren't going to grow. You say, okay, well, we can measure all of those things, and we can see if that's true. And the interesting part is when you quartile out uncertainty, the more uncertain the environment, the higher the odds of the stock market advancing and the higher the odds that corporate America hires and the higher the odds that there's capital spending. Nobody thinks that way intuitively. But by the-but-but-but-it's like the barons head, like the covers.

it's by the time it is so visible, it is more likely than not already discounted. Corporate America has already not spent. Corporate America has already not hired. The stock market has already worried about all the things that you're very visibly worrying about. And I mean, to put a fine point on, I don't remember if we talked about it last time, but remember, I mean, the low in the market between like 1976 and 1985 was 1978 before either of the recessions happened. So if you said, like, hey, Denise, I know what's going to happen. We're going to have two back-to-back recessions and rates are going to go to 15%. Nobody buys that.

But then if you said, like, I'm going to sell in 78, I'm going to get this right, I'm going to nail the risks, I'm going to get the risks right, and I'm going to buy back at the end of 82 when jobs finally started to recover, you lost 40% cumulative nominal returns. So we saw a lot of worries in the first quarter of the year where the market didn't really seem to react to the news immediately. And there was a lot of people thinking, like, how is this happening? the closure of the Strait of Hormuz was supposed to be a black swan type of event where oil goes up to $150,000 a barrel, S&P closes limit down. Like that's sort of, you know, it was a black swan type of outcome.

And the market seemed to be sort of yawning past it. And you had this weird dynamic where earnings estimates were rising and prices were coming down a little bit. And so you saw the valuation compress in a big way. Yes. So you went through history and you looked at this, Daniel, chart one, please, of the valuation, compression over a six-month period. What were you saying during this period of the multiple coming down with this weird dynamic of earnings skyrocketing? Yeah. So it's an interesting dynamic. This is rare that you have this kind of multiple compression. But if you go like reverse to when

we started the year, I had a lot of people, you know, asking me just either even from a institutional perspective, like how can you be bullish on the market when the market is up so much over the last three years and stocks are expensive? And the problem is, again, quantitative. And the problem is, again, neither of those things bend your odds for underperformance of equities, right? So the more the equity market goes up, you guys know, like momentum usually begets momentum, which is not to say that it's 100% of the time, but it is to say that if you bet on that, if you want to take the other side of stocks going up, you have to accept the fact that it's a lower likelihood, not a higher likelihood, and you know something that the stocks don't know. Second, same thing for, you know, valuations.

Like there's no quartile difference in terms of the odds of an equity market advance. Coming into the year, for me, what has been different since 2022 is the equity market is just persistently fearful. You can measure it in valuation spreads on a rolling measure of the VIX, right? I mean, during the tariff tantrum, you know, you saw the VIX spike to 50. I think during this tantrum, we saw it spike to 30. When you sort of roll it out through time, when you look at the fear in the equity market that has been persistent relative to the fear in the credit market, that's where you start to get this linear relationship that you potentially want to take the other side and the market has more

likelihood to climb the wall of worry. I'm so glad you said that because people point to the stock market and say, what on an all-time high? What do you mean there's fear in the market? Even last week or two weeks ago when the S&P fell 2%, it was nothing, the pull call ratio spikes immediately. There is a lot of fear and it's really hard to have both of those thoughts in your head at the same time.

Because you think like, oh, this is bubble everybody's in? No. And that is why it keeps grinding higher. Correct. I completely. What would be your signal, though, for that? What would have to happen for you to say? there's not enough fear in the market, multiple expansion again?

Yeah, so the 15% down sort of confirmed that whole thing. Think about how hard, though, it is to have 29% earnings growth and outrun that with price. Yeah. We would have to have like a 70% rally in the market in order to get multiple expansion. Well, thank God we didn't have that happen. Right, exactly. Well, that's, exactly. So when people say, like, what could be the problem, something like that,

where you see very little fear in the equity market or a bubble like that in terms of that price advance or something like that looks more like that. And good economic times. Top quartile, you know, GDP growth, which we're still grinding it out at like two, two and a half. And we'll see where earnings growth ends up. But, you know, for the most part, it's been between 10 and 15. So don't you think it's easy to make the case that investors as a whole are being sober right now, even though we're about to get to some of the crazy shit that's happening because there is obviously crazy shit happening.

But I've said this to Josh a million times. In today's modern digital markets. Yeah. In a bull market, there will always be maniacal behavior. Like, that's just, there will never not happen again. And side shows. Yeah, of course. But in the aggregate, the fact that we are not outpacing earnings growth, I think the

market is being pretty sober. Completely agree. All right. Right. So rewind back to, I guess, earlier in the year. I don't know when we made this chart. But remember the forward PE of tech, next chart, please, Daniel, and the forward PE of the S&P 500 converged.

Yep. Yeah, yeah. And we were like, is this good? This is bad. This seems weird. All right. Well, that was the fat pitch. Yep.

We got it. Literally the FOP of tech and the whole market converged for a minute. So you had a chance to buy all of these quote-unquote high flyers at the same multiple as the overall market. So we made this last week. I forgot to put in the deck. But even better, we saved a few, Denise. Yeah. Roll in the 38-day performance since we made this chart or since those lines converged.

Look at that fat pitch. Look at that home run. I know. It's a plus 15%. So it's a performance but of tech versus the S&P over the time period. Yeah, no. And we have the data going back to the 60s, right? I have it going back to the 30s.

That's all. I don't really have technology data. I was like, wow, you'll have to share that with me. There is, there's a relationship. The cheaper technology stocks have been relative to the SMB500, the higher of the odds. The tech in the 30s was brooms. The rooms were very big. So in many ways, the multiple compression is justified because the companies themselves are undergoing

a transformation. Going from CAPX light, predominantly software businesses with crazy high margins, a little bit of R&D, a little bit of CAPEX, but nothing crazy to 120% cash flow going into long-term infrastructure projects. Can't say their capital light anymore. Maybe with the exception of, I mean, even Apple would be a stretch. They're the only one not engaging in this CAPEX frenzy. Their CAPX actually is down versus last year, at least so far.

but like these stocks should not be trading at 35 times earnings anymore. They are industrial. They're very modern industrials. What do you think about that? It's a great point. Well, I think it depends on their ultimate margin structure, which we don't have the answer to you yet. I think to your point, like could-

In this transition period while they build, they look more like heavy industrial companies with a much higher margin structure and return structure. So far, yeah. Currently, that's what I mean. So what we know is to date, that has not been true in the sense that they have, have spent more in terms of CAP-X, and yet they have retained this margin structure. Now, we will see where it ends up. Again, like, all estimates don't always come to fruition.

What they will spend, maybe there will be bottlenecks. Maybe, in fact, technology will do what technology always does, which is make something, you know, very expensive and scarce, and that will make it cheaper and abundant, right? So maybe this CAP-X ends up not being as egregious as we think and doesn't weigh on free cash flow as much. So there are all kinds of possibilities. I think that what was the debate in the bubble was that... all of the spending was very clearly not associated with any margin or any earnings.

And to date, the spending that we're saying has been associated with. So we made that, we've made that point before. And we've also made the sort of parallel point that the equity funded bubble of 2000 is very different than the cash flow funded bubble of today. Yes. So that may not stay true. I think half the backlog for AI CAPEX is Open AI Anthropic. And that money is very obviously has to come from IPOs or raised assets.

So that's sort of equity issuance funded spending. But like the CAPX itself is coming directly from the companies that are most capitalized to actually do the spending. And also look at meta. So they've obviously spent a lot of money on AI. And Reels, which is a three-year-old product, is now doing $50 billion. in annualized revenue. That's more than Netflix. And that is a direct result of the AI spend.

Right. Reels has become the world's most addictive product. It's literal heroin. If you walk through an airport and just look to the left, look to the right, walk through a terminal, you will see eight out of ten people are staring at their rectangle. Eight out of ten. If it's kids, it's ten out of ten. And that's wheels. It's a little bit TikTok, but a lot of reels.

and they've used AI to essentially rewire our brains. We can't stand on an elevator and not look down at the phone, right? It's like, it's captivated. So AI has enabled just an incredible step change in how addictive meta is and how good they are at serving ads, more, more, most importantly. Right, which is how they generate. So the biggest beneficiary of all this spend in the market today and the area where if somebody said, Michael, what do you mean the market is sober?

Have you not looked at semiconductors? Yeah. Okay, fine. Point taken. So chart three, Daniel, please. The Sox index is 69% above its 200-day moving average, which is unlike anything going back to. So I guess we only have data going back to 2002 here. Okay.

But we've never seen anything in the last 25 years like this. It is going straight up. We spoke. Josh and I were talking about Micron, how it just joined the trillion dollar club. It's the 11th stock, and I guess Anthropica is on its way. So on Tuesday, UBS raise its chart for Daniel, please. UBS raised its price target for Micron to $1,625 from $5,000, more than double its closing price on Friday of 751. Without commenting specifically on Micron, you would agree this recent development of these memory stocks and Korean stock market and all related.

Some semiconductors that Denise is not specifically talking about, you would agree this is an area that's causing portfolio managers and market watchers to be like... Wait a minute. What's going on? I'm getting shades of Cisco, Lucent, JDS Unifase. Like, I'm getting those feelings back from 25 years ago. You'd agree there's some element to that. Yeah, so that's where I think the date is really interesting. Should we short, Micron?

I'm just teasing it. I know you're teasing me. I want to answer. It doesn't matter. So, no, I think that's a really interesting point in terms of like when you aggregated together, forget Mike Griner and the individual stock and just aggregate all the semiconductors together. You go, okay, well, what's happened over the last six months, right? They're up 70%. What's happened over the last year? And now let's look at the data. Let's just pretend, again, back to sort of all the charts. Like, let's pretend we don't know the answer. And let's be open minded. Now you look at that and you can say, okay, well, it's been up 100% before over the last year. And two things. One, it's exactly in line with the earnings growth. And two, if it's important. And it gets more important in a second. And two, if I bought it every time it was up 100%.

Clearly the bubbles was one instance that was negative. But more often than not, like 55% of the time, it goes on to outperform again the next year. The interesting part is let's forget semiconductors for a second. Let's take all of the industries going back to the 60s for anything in any GIC sector and say, well, what if I bought them when they were up 70 to 100%? Any sector that's up 70 to 100%. Any industry. Industry.

So one click down. So that'll be, it's only happened like 2% of the time, you know, historically. But every sector kind of has some participants. 65% of the time they go on to outperform. That's a lot. Right? Surprising, too, which is sort of to the point of, wait a minute, is there something in the market is not?

But investors aren't stupid. Like, there's a reason why this happened. They're not doing this way in the way. Because what the anomaly is has been earnings growth. So over the last two years, the price performance is less than the earnings growth have been for semiconductors as an industry over the last two years. Right. That's the anomaly.

They've never compounded earnings like this without being down 100%, or, you know, not 100%, and then up 100%. But now this up trajectory, let's call it more than 50%, has lasted more than two years. That's the difference than history. I think the average investor, they see the price. Right. So they see like the Wall Street Journal had this great chart. The Washington Journal had this great graphic showing the time between reaching $500 billion

in a trillion dollar valuation. And Berkshire, I mean, you know, whatever. It was a long time ago. But Micron, it happened in how many training days? Is that like, I don't know. I can't see. It doesn't say, but. Yeah.

20. And it's ridiculous. The speed out which has happened. So we made a chart showing that Micron, we're showing its path in the S&P 500 over time. And a year ago, like not a year ago. It was the 127th largest stock in the S&P. It was a less than a $100 billion market cap just a year ago. And it's now number 11.

10 years ago, it was number three. The speed. The speed is amazing. So, Denise, you have a chart showing the relative forward PE of semis. Yep. And they tend to trade at a, I don't know, discount. But investors don't give them the premium multiple. Right. So I had a friend of mine who credit to him, he's been in Micron for a while. He's made a lot of money. And I was saying like, hey, listen, I'm not like calling a top of Micron or anything like that. But like, when something goes up 5% a day, set some sort of exit plan just while you're sober.

And maybe he's drunk on the gains. But like, because if and when this thing falls, it's just going to be disoriented for your brain. Like, I'm not making a short term call. But just having this conversation with it. It won't fall 5% a day. It'll fall 20% a week. Well, it just fell 30%. Like after earnings.

Right. It just did. So anyway, the point is this. He said, well, it's sold out for a year. Is it still a sick little business? And I would say, yes. but you know a lot more about this than I do. Well, I would say, so the trick with cyclical businesses, if they're cheap, right, that could be the peak in earnings, right?

So that's to your point. Like, if this is still a cyclical business, then valuation doesn't look from a probability perspective the way it currently looks for semiconductors, meaning that I have this linear relationship. The cheaper the stocks are right now over the last 10 years, the more likely the stocks are to outperform. Right. So I think some of what we're seeing right now is a changing business, right? we just talked about that in terms of earnings. They've never compounded like this. Now, whether or not, like, earnings is a peak that part, I don't know.

But what I can say is that the valuation compression that we just saw, again, that two-year stack in terms of the earnings growth, it's almost like a catch-up trade. And some of this valuation multiple is saying, look, I understand that there's a lot of fear in the market about what this might mean. Some of that's in the stocks, right, which seems absurd to your point, like, back to the point of like, can you say that? Yeah, there's fear in the stock. It's only up eight X.

Exactly. So again, it sort of, you have to sort of put the case of, yes, anything that goes up that much can also go down. But when you think about measuring fear quantitatively and measuring valuation support, there's, you know, 70% odds are not 100% odds. But when you see a pattern like that, I think you have to be a little bit more open-minded that price might be understanding something that you don't quite yet. What's that 70% that you just mentioned? So the odds of semiconductor outperformance over the next 12 months based on when your starting point is in that bottom quartile of value. But do you still think they're cyclical? Yeah, but the nature of the cycle itself is probably changed. So maybe the cycle used to be three years and now it's seven and we won't know until we get to eight and look back and say, oh, that was the peak of the cycle. One of the things that distinguishes this from the 2000 bubble, Micron in particular. So I'm old enough to remember two years ago when they were comparing Nvidia to Cisco. We don't tell that.

Nvidia Like basically has become Taylor Swift and Micron is Olivia Rodriguez. And like the younger girls don't care about Taylor Swift anymore. Okay. Okay. So now we're not saying we're not saying Nvidia, Cisco. Maybe we're saying Micron. So people are pointing back to like the telecom fiber optic boom and how like they laid all this fiber and then nobody needed it.

and all those companies went bankrupt. And then it wasn't until five years later that YouTube came along and all that fiber that they thought was worthless. And I was in these stocks, like MFNX, and like I owned all of these things. I don't love that comparison or that analog because Micron's memory is not being installed in a data center and then collecting cobwebs. Like the stuff that they're selling is put into use of me. immediately. Now, you could argue whether or not that will continue, but that's not a great

comparison to Cisco and fiber optic cable in the year 2000. This is not CAPEX with the expectation that maybe somebody will need it. They're literally saying we're short compute based on today's demand. Forget about what we think demand is going to be in three years. Do you think that that point is made enough on the bull side? Do people understand it really? I mean, I think it goes back to the like idiosyncratic versus, you know, systemic in terms of like how you add it up. So, yes, are there individual stocks where you could sort of make this comparison? But the problem was in the 90s into that bubble. It was everybody, right?

So the median technology stock, their earnings peaked in 1996. Whoa. Right. That was the disconnect. Yeah. Right? I mean, this, like, could we get there? Sure.

But we're a very far cry from there. The median tech stock is profitable. Obviously, the cap-weighted tech stocks are profitable. Operating margins are still increasing. Could we look back at some point and say, this is the peak? But again, back to that, okay, let's pretend then this is the peak. What if then it's 1996? Okay.

Do you think if Anthropic and Open AI were public companies reporting financials on a quarterly basis, holding conference calls and had ticker symbols that people could see, the visibility of where the spending is going and where the revenue is coming from would be a better source of comfort to people. Because I think one of the issues right now is a lot of this CAPEX is going into projects being paid for by Anthropic and Open AI. And they don't have tickers. The circle door.

And they don't talk to the public unless they want to promote something on TV. But it's not the same as seeing a public company spending and then being like, okay, I get it though. they're also generating revenue. We're getting rumors of revenue about these companies. They're like casually mentioning their revenue at the Milken conference. Like we don't have the data at our fingertips. And maybe that's why all the KAPEX spending, it's harder to tie it to revenue that we can actually see.

Do you think that's an issue for investors? Is that maybe why there's so much suspicion? Yes, but I'm not sure transparency would solve the suspicion. To your point, like I think they're at. There are skeptics out there. I think the skeptics will probably continue. And in some ways, like, I don't know. Do we want comfort?

Because so far, it's been a decent investing setup. So do we need people to be more comfortable? I'm not sure the answer. That's a good question. Do we need that as the driver? Well, the people who are long right now don't need that. They're fine. What are the areas of the market where there might be too much enthusiasm?

And this is hard to say what's priced in or not. But it might be the analysts. So this is from BC Alpha Research. They grabbed this data from FACSET. We're looking at net profit margin for every sector. And they're expected, I mean, they're at all time highs and they're expecting even more gains. What happens if this doesn't come to fruition?

I think you keep saying like the diffusion and the breadth of companies benefiting from this. Do you think that this is more likely than not that margins are going to keep going up? Because this to me is the, this is it. This is the whole thing. Right. Yeah. So I would say, let's look at the forward indicators in terms of what's correlated to margins. And the biggest correlation to margins is unit labor costs. So labor, especially when you sort of compound it for productivity, that's, you know, corporate America's biggest, for the most part, cost, which is not to say that there's not other input costs. But that's the main, I would say that the main corollary. And so when you look at unit labor costs over time. Every sector? Yeah. So most sectors, the vast majority of sectors, and then when you aggregate it up for the market overall without a doubt, So I think you have this unique combination of unit labor costs are in the bottom quartile of history, right?

So that is very rare relative to like, you know, three percent inflation. So it's partly because wage pressure has been, you know, continued, I would say, with, you know, in conjunction with productivity advancements. So that has the correlation to profit margins. So the lower unit labor costs have been direct relationship, the higher corporate profit margins usually are. Do you have to put token spend back into the unit, the labor. labor costs? Why? Because a lot of the money that on a CAPEX side is being spent on the robots. Already? Or the machines? Not yet. I would say from a proportion perspective, not yet. Maybe that will change,

but I don't think we're there yet. Oh, so like we're saving money by hiring people, but we're just reinvesting that money into compute? Like that or even? We might be. Yeah. Yeah. And so, but I don't think that that's where the productivity is coming from quite yet. But I do think that wage growth has been restrained, productivity is on the uptrend, and that usually makes corporate America more profitable. Again, back to just relationships, right? And then you add in that fact, too, so you go, okay, so then these are the expectations. You know, they continue, but yet we're seeing this, you know, persistent fear in the equity market and this multiple compression saying that some people are already pricing in the fact that it won't continue,

meaning that there's already the fear that there are these risks. So you end up in the same situation where the forward drivers do suggest that it's more likely than not, the profit margins are higher rather than lower, and the market doesn't believe it. Let's talk about the diffusion that you spoke of. Yeah. I think this is one of the most unsung aspects of the bull market. This year, last year we talked about it a lot. The financials had a great year.

Yeah. There's a lot of money to be made in things other than tech last year. This year, I feel like the focus has gone back to AI CapEx being the only game in town. But here's a chart 11. This is the S&P 493. Yeah. The earnings revisions for the first quarter. And I feel like this is, I feel like this is trending in the direction that you'd want it for the overall market.

Right. So it's like more, more upside from more companies that are not mag 7. That's correct. I think it's a unique setup in the sense that there's been a big divergence between cap-weighted earnings growth and equal. weighted earnings growth. And while cap-weighted earnings growth was been, you know, fine and good for the last three years, equal-weighted earnings growth has actually been contractionary. From a duration perspective, smaller companies have not had the same earnings boost. Correct. And I would say not only the same earnings boost, we're actually seeing earnings decline. Yeah. From not a magnitude perspective, like we saw in

other recessions, but from a duration perspective, it was as long as those recessions. So that's why, like, 2022 was kind of recessionary from a corporate America profit perspective. It wasn't, it was a full employment recession. This is a full employment recovery. But this is just now getting back to a situation where equal weighted earnings growth can grow and be durable. And from a pattern perspective, you see the symmetry between the duration of the decline and the duration of the support. How long was the duration of the decline? Three years. Three years. So where are we in this earnings recovery for the 493. Like we're four months?

Yeah. Yeah. Yeah. I mean, I started writing about it in the beginning of the year that we're just really getting started. So the Mag 7, the Mag 7 are up 6.6% year to date. Yep. Which is underperforming the market.

X-Mag. X-Mag is up 10 and a quarter percent. So I thought this is really welcome, welcome site. Daniel Chart 5, please. The top 10 stocks in the SEP 500, in terms of what's contributing to the overall gain. Google's number one. The fact that Micron is number two is so insane.

It started the year at $100 billion, and it's the number two contributor. It's added 100 plus basis points to the overall index. It's remarkable. After that, you've got Nvidia, Apple, AMD, Amazon, Intel, Broadcom, sandis, and lamb research. So we're noticing a theme here, okay, obviously. But they all add up to 2.3%.

Guess what? The index is up 10%. Pretty damn good. Yeah. Well, that's why it's interesting when you talk about people saying, oh, the market's dependent on the Mag 7. The Mac 7 underperform for the better part of the last 18 months. And they themselves are diverging from each other. Correct.

Which I love. Correct. Maybe we'll have to come up with another acronym or something. Well, we're going to have to add SpaceX to Mac 7. It's going to be Mag 8. Tough acronym. Okay. Right.

But it's definitely going that direction. Do you want to do this one? Which one? Margins outside tech? All right. So this is also very welcome. Margins outside tech. Is this AI basically is the close?

Yeah. So what do you think? Why are margins expanding at this rate outside of technology companies? Because they're the users of AI and they're expanding their margins? Not too early. I think it's too early. I mean, you're definitely seeing productivity advancements specifically in software. But I don't think it's diffuse relative to the rest of corporate America.

And again, I would go back to the, if you ask me what's sort of, the driver behind that, I would go back to the pattern of unit labor costs, right? And that's sort of the driver, at least the corollary, the tightest corollary that I've ever seen with corporate profit margins. So I want to get your take on this and sticking with the rest of the market. So small cap earnings. I forget what the overall estimate is, but it's like 30%. It's like a number that you're like, wait, what?

How? So one of our guys, Chartkin Matt, compared the small cap earnings, the Russell 2000 versus the SMP 500, the expected earnings over the next four quarters. And the spread amongst the two is gigantic. Energy and materials, I think we sort of know what the story is there, at least in the energy side. But what's happening with financials? How are they expecting 66% earnings growth for small-cap financials

and just 7% for large-cap? And similar things with real estate and discretionary. The spread is gigantic. Do you feel like it's the calculation in terms of the non-earners and how you calculate that from people? Perhaps. At the end of the day, like Russell 2000, and what we went from, we're close to at least 20% and more non-earners.

Oh, so a company's losing five cents and now they're going to earn five cents? And how do you, right? Are they in? Are they out? I think that's the issue. I think with the 600's directionally the same. And certainly with the mid-shadow. Yeah, yeah, directionally the same. But I think that we overstated it.

But what do you think is driving this? Do you think it's, because it's not the expectation of Fed cuts, which we're going to to talk about? No. Because that is going the opposite direction. So what do you think it is? Because you're right, like the equal in a small cap. Yeah.

earnings have not broken out yet. Correct. No, I mean, I think it's all the beginning of a recovery, right? So, and you're all seeing this together. It's the manufacturing recovery that they're, you know, linked to. So the same thing, like when you look at ISM, right, ISM new orders, inflected higher for the first time in three years, right? It's very rare that the manufacturing economy is in, I would call it, maybe recessions overstating it, but a malaise for three years. The last time you saw that was like in the 80s, right? And you see a big corollary to smaller businesses and productive capacity in the U.S. So it is just starting to emerge to what normal growth actually looks like.

And that's where I think you get from a non-earner perspective to a flip to earner perspective. This is the beginning, right? This is exactly where it starts. So it's all linked to that median earnings growth is finally emerging from what I would call a recession that's lasted the better part of three years. What do we do with inflation? What do you mean? Buy it, sell it.

It's not trending in the right direction. It's changing the story of what we thought. the Trump appointed new Fed chair would be able to do, would want to do. They just pushed the first rate cut of 2026 into December in terms of the probability based on trading. That probably, my guess, I don't think we get any kind of relief on the inflation numbers next month, the month after. I'm guessing they'll push that 26 cut completely off the table and maybe start talking more

about a hike. What do we do with this as investors? So I have a lot of thoughts on inflation. So the interesting part is as an investor, right, do we get any relief? Do we need relief? Do we need it? As an equity market investors. Does the TPI have to cool off to two and a half?

Or can we just... The sweet spot for the equity market is between three and four, right? Inflation, yes. So I actually have a chart of that. I know, it's ironic. Chart 15? Yeah. I don't think you have it.

Yeah, this goes back. Yeah, yeah. So, I mean, so that's one irony, right? Which is what you know, like equities act like an inflation hedge, right? The times when you don't want to own equities are when it's top quartile. Inflation is top quartile and rising. That's four and a half percent. We can debate whether or not we're going to get to four and a half percent from a core

CPI perspective. I don't think we will. And we'll talk about that next. But that's the area that you don't want to own equities. Anything sort of like, you know, in this inflationary dynamic, which we're a part of, I would call it the middle quartiles. It's not the driver, right? Earnings growth is to driver.

And again, if earnings growth is to driver, equities can be a valid inflation hedge. So there's an interesting pattern there. As it relates to overall inflation, so this is, again, this is, I don't want to say controversial, but so if you look at core CPI and you take out shelter, if you say let's call shelter a supply shock this time around, because that's exactly what happened, right? Interest rates went up. Everybody was locked in their mortgages, so nobody wanted to sell. So it's acting like a supply shock.

If you look at core CPI X shelter, do you know what it was last quarter or last month, 2.3%. Oh, right. The shelter component is what's making. it look like it's way worse than it is. Yeah. Well, people really do care about shelter, though. No, but I understand that they should care. It's not about what the consumer feels.

Yeah. This is about how the Fed should manage. Well, that's a good point. Those are different, right? So the reason why you look at CoreCPI and we'll get into energy in a second, but the reason why you look at CoreCIP is because if you're the Federal Reserve, you don't want to double down on supply shock, meaning that if oil acts like a tax hike, the last thing you want to do is add rates to mitigate something.

You can't control anyway and make it worse. Sorry about the gasoline prices. Here's higher interest rates. Correct. So that's why. That always made no sense to me. That's why they look CPI. And the interesting part is, so when people are worried about higher rates this time and you say, well, okay, we can observe that rates are going higher.

But again, let's assume we don't know why. So when you look at oil specifically and you chart it out, we have a great chart of this. I don't know if you have it up or if you have it. But when you sort of quartile out the oil like advances that you see over time, 10% 20% all the way up to 60%, you say, is there a pattern between what has happened to oil over six months and what the Federal Reserve will do over the next 12 months? There's a negative pattern. The bigger the shock in oil, the lower the probability that the Fed hike.

25% is not zero, but even when oil is up 60, what you see is only a 25% chance at the Federal Reserve hikes. Why? Because most of the time since the 1980s, you don't see a pass through to core inflation. And by most, I mean 48%. Let me quote you. Let me quote you to yourself. You said many investors and Denise, you read on LinkedIn weekly.

Yes. Okay. Many investors see higher oil prices as the factor that's increasing the odds of a Fed hike. But when you examine the data, oil-driven shocks have historically made the Fed less likely to tighten, not more, functioning more like a tax on the consumer. It's great news. Then a catalyst for broad-based price increases. And by contrast, what clear pattern emerges? Yeah, growth. Growth is the clear pattern. And the funny thing is, like, when you look at, I wrote a lot about the manufacturing recovery earlier on the year, durable goods orders are actually in the top quartile of their range.

Chart 14, Daniel. Yeah, so that's chart 14. And then you do see this pattern, right, between core capital goods, right? So the strongest core capital goods, that's the quartile we're in. That's the quartile we're in. That monotonic relationship between between the higher the growth is in terms of durable goods orders, the more likely the Fed is to hike. And which quartile is in right now? We're in the top quartile of capital goods. Yeah. So you think they're going to do it? I don't know. I mean, it increases your odds to 65%. I would say that, again, you got to go with the base cases, okay, so something changed in terms of the probabilities. Let's be open-minded to the probabilities. Then the question becomes, okay, let's say they're going to hike. Do I care as an equity market investor? And that's the unique data set, which is you find out really quickly. Chart 15, Daniel. Which is it's not about, oh, we're going right to magnitude. This is so important. We're so, we're so. I don't know if you know this. I am a television star. And we spend so much time on TV talking in binary terms about hikes versus cuts, what's good, what's bad.

There's very little discussion of magnitude. Yeah. So let's talk. Let's get it. I'll sign an autograph after this. Let's get it. I think it's interesting. So if there is growth, you usually see in these middle two quintiles or quartiles

of the Federal Reserve hiking interest rates. So these two quintiles are zero to 100. right? So if you're hiking like 25 basis points and maybe 100 basis points over the course of four meetings over the course of a year, those are your market odds, right? And there are higher odds of a market advance than baseline, right? So baseline 75%. And you would say, if I knew everything about what the Fed is going to do, whether they're cutting or hiking, what's my best probabilities? It's the Fed hiking by just a little. A small hike and a stock and a stock market that is not disturbed by it. Correct. Because it's a reflection of growth, not the highest likely.

growth to it. Yeah. Right. And it's more like it's indicative of the fact that, you know, rates confirm the cycle, that rates or the Fed follow the cycle rather than potentially create it. And if rates are a reflection of growth, the market's got no problem with it because they're focused on growth. How often did new Fed chair people come in and hike? I know there's not been like a million examples, but.

I actually don't know. Well, it ain't going to be this guy. I could tell you right now. It reminds me of the O. Henry story, the gift of the Magi, where, There's a husband and wife. I don't know. Right? What is talking about?

As a husband and wife, they each want to buy each other a gift and surprise each other. Oh, I do know this story. Right. Yeah, yeah, yeah. But they don't have money. And there's a whole thing that goes on. It's not important. But in the end, he buys her this beautiful hairbrush.

I don't know if it's like ivory or something. She cuts off all her hair for the money to get him a gift. Yes. So there's some element to that where it's like, all right, oil price spike, Definitely uncomfortable for the consumer, for business, high gasoline, very real. And then the reaction to that is, well, we're worried about the reaction to it is that is going to make its way into other prices in the economy, which I understand. But then the reaction is going to be, well, we're going to raise rates. Well, first of all, you ain't going to change the price of oil by raising rates.

So what are you really doing? You're just exacerbating the high prices that you were worried about in the first place. I think that's correct. Okay. So, but they, I mean, I'm not a PhD. Surely they understand this. Right. I do think that they understand this, they must.

I would say that it's clear in the data, right? When you see in history the fact that the Federal Reserve is less likely to hike, the bigger the spike in oil, I think that they see it exactly the same way, that oil is like a tax hike on the consumer. And the interesting part, again, since the 80s, I mean, this doesn't include the 70s and the big inflation spike, which is different because of unit labor costs. But if you say, like, what are the odds that it does get passed through? I would say less than 50-50. And I think that we saw this movie with tariffs, right? In some ways, corporate America doesn't get to decide what it can pass through. The U.S. consumer decides what it's going to absorb.

And that's, I think, what's very different. So if real incomes aren't excessive or, you know, we're not getting rained down in terms of 15% GDP coming out of COVID or something like that, if you have to spend more money at the pump or from a tariff perspective, more money on watching machines, then your marginal propensity to consume goes down in other areas, and their marginal ability to price goes down with it. So you saw, again, I think over the last 12 months, corporate America, like, try and increase prices, and then quantity demand fell. And so what did they do? They cut prices, right, to increase quantity demand. So I think... Where do we see that, autos, like airline tickets? Pepsi. Yes. Yes. You saw that in some consumer goods. Yes. Right. So forget about Fed funds rates for a second. And let's talk about the 10 years. Yeah. And the longer...

end of the curve, which people have been nervous about the last couple of weeks. Do you think that's appropriately priced given how strong demand and growth are? And therefore, it's not necessarily something to be worried about. Yeah, I would say it's not anomalous at all. Like when you look at it relative to growth. I mean, again, it goes back to the like, would we like it lower from an accommodation perspective? Not clear in terms of the data. Lower rates are often a reflection of lower growth.

So no. And when you sort of quartile it out and you say, okay, where we are relative to where GDP is or where it would be, you would say there's really nothing to see here from a pattern perspective. And where was the 10 year in the 90s? It was like 5. Exactly. Exactly. Exactly. All right.

So there are, there are, the IPOs are coming. SpaceX is looking like sometime in June. Who knows about the, the frontier model is open AI and, uh, anthropic. But let's just assume that at some point. Yeah. So we have a chart showing the. actual money raised. And we did not inflation injustice, okay? But in 1998 and 99 and 2000, which was a legitimate IPO boom. Obviously, the numbers were smaller, okay, not inflation

adjusted. You could say mania. But it was a legit, full-blown mania. Yeah. And it's possible that at some point over the next year or whatever, we're going to have as much supply coming to the market from SpaceX, Open AI, and Anthropic. I mean, this is the, this is the big one. Do you think there is enough liquidity, enough willing buyers? Can the market take on this much new equity? For the people listening and not, before you answer, for the people listening, so Michael's chart is like, you look at 1998, 99, and 2000, you had 34 billion worth of IPOs, then 65, then 65.

That's 164 billion in three years of new equity issuance. Contrast that with this year, if we were to get, SpaceX, Open AI, Anthropic, those three deals, we think, would add up to something like 170 billion would have to be raised. And these numbers look light and, like, I mean, and these numbers are going up every minute. Yeah. So three companies versus, I don't know how many IPOs are we think in the 98th, 2000 period. Hundreds.

But don't we need to rebase it in terms of market cap? Yeah, of course. But if we rebased it in terms of market cap, wouldn't that look 25% of that? Yeah, probably. Right. All right. But whatever. Let's just, just, it's a lot of money.

delete that portion from the show. No, no, no, no, but this is something that people are worried about. Yeah, no, I understand. You guys know more than me about, like, IPOs. And clearly, you can look back in history and say IPO, IPEO booms are at least correlated with some potential buss in the sense that they usually correlate to euphoria in the stock market, which is usually around boom conditions in the economy, boom condition and earnings.

It's very diffuse. So they all tend to happen together, you know, bullish sentiment, you know, exorbitant earnings. And by exorbitant, I mean, like top. quartile, right? All of these top quartile indicators. We're not there in any other indicator. You talk, but you talk to portfolio managers. Is anyone talking about what they, the fact that they might have to sell things to participate in some of these, like, there's a certain amount of money you have under management. Yeah, yeah. All right. So now you have a company that you already know, if you're being benchmarked to the S&P or a growth index or NASDAQ, you must own.

You literally must either own SpaceX or it crashes and you look like a genius or something in the middle. But like you have to do something. It's a rebalance challenge. I mean, I think that we've seen this over and over again with the Russell value and growth indices. And the market handle 80s. We had a guest on our show a couple days ago, his math. Let's assume it's the case. He's saying it's like $74 billion they'll raise.

and then if the green shoe is exercised, which of course it will be, be like $86 billion. Okay. That money has to come from somewhere, especially if you think they're going to engineer a pop. Like it's going to open, it's going to open up, like, not down. You probably need like 2x that in order to get a pop in the stock. Somebody has to sell something. That money doesn't just come from like another planet. So like, is that a concern in the near term for investors in other tech stocks?

because I'm assuming that's where the money will come from. Yeah, I mean, we'll see in the near term, anything can happen, right? So in the long term, and by long term, I mean, again, over the course of a year, which is generally my time horizon, it will be what will matter the most will be earnings. Right. So you will get, I'm sure you'll get more volatility or at least idiosyncratic volatility, maybe not at the highest level of the market for a time from an absorption perspective. But I think that that might be more short term than you think, which is. like I said, go back to the rebounds that we have. Again, this is a little bit of a different issue, but we've seen rebalances like that

that are sizable before in Russell versus growth and 2000 go into sort of the midcap. And all of that, yes, there are absorption issues over the short term, but over the long term, and again, just a one-year time horizon, earnings is going to be the driver. And that will ultimately be the determining. So we'll get through this level of new equity issuance because the earnings will bring people back in as buyers. Correct. This would be a good time for buybacks to kick back in. Yeah, we're going to get all this equity issues.

Stick it with like the speculative stuff. Does the speculation worry you at all? Is it a total sideshow? So like the meme ETF from Roundhill is at an all-time high. It's a relatively new-ish ETF. Like they issued it, I don't know, in the last 12 months, I think. It came out in October 25. Okay.

It's at an all-time high in terms of price. Alt-a-high. October 25. What does it own? So the, but my point is like, the mean names are working. Yeah. It owns red wire, AST, space mobile. So, all right, space, applied optoe electronics.

I don't know what that is. IREN. So a lot of the quantum stuff applied digital, rocket lab. The junk is working. So, yeah, I did an interesting piece on this for risky tech. And because there's a lot of charts making the rounds, if you do like top quartile beta, right, or highest beta stocks within S&P technology,

they were hitting all-time highs. And like the inflection was very similar to what we saw in 2000. The interesting part about that is when you sort of rebase it for relative to the S&P 500, they've actually lagged broader tech. And the funny part is, and I had this chart, so if you look at, if you just look at high beta tech versus tech,

it's been in a downtrend since the 90s. Yeah. Like you generally don't want to own risk, and it was, it sort of oscillated right back to the top of the range. So you'd say it worked in the way that it's worked other cycles, and you would say there's nothing anomalous to see here,

relative to the rest of technology. You could certainly say that because it's rallied so much, it's fairly expensive, and there are better portions to own in tech that are not high volatile. But you also wouldn't say that you would sell technology as a sector, meaning that even if risky tech underperforms, you still see the less volatile tech actually outperform to the 2 to 75%. So it doesn't look, when you start to normalize things in terms of risky tech relative to tech, and you sort of look at it relative to other cycles, nothing looks particularly anomalous.

And then if you layer on the fact that, you know, sort of let's just get, you know, let's think that the median earnings recovery that I was talking about is right. That's exactly what you should see, a junk rally in the beginning that you generally speaking don't want to chase. So I want to, you first of all, you're amazing. You know that. I want to sum up for the people that are listening, watching, but maybe didn't absorb every one of these very important things. the number one thing for me from this conversation is that we could be relatively early in the earnings growth cycle for the $4.93.

Is that right? That's correct. So we're all assuming like we're at the end of something because stocks have been going up for years. It feels like uninterrupted. I know it has been interrupted. But this concept that all of a sudden, margins are expanding for small caps, the equal weight is seeing

faster earnings growth than the max seven, the $493 is. is a better earnings story for this year. I don't think the average investor is aware of that or understands the meaning of that. And you're talking about this sort of symmetrical where we had three years of these companies' earnings being under pressure. And so what if we had three years of earnings expansion, margin expansion for everything that's not a Mac 7? That might be the most underappreciated aspect of the market. The second, do I have all that right?

Yes. Okay. The second big takeaway is the multiple compression, and that's sort of a favorable setup so long as it's not coming as a result of earnings falling. Correct. And the stock market falling faster. That's not what's going on. Correct. What's going on is people almost don't believe the growth can last.

So we're seeing, okay, that's not a negative. And the more skepticism there is, the more you can climb the wall away. Yes. And then the third big point that I took from this is you don't really see the Fed as being a major issue in the second half of this year. Did I miss anything? No, you summarized very well. Very good at this. Yeah.

Professional podcast host. He is too. I know. Certified. That's why I'm here. Did you have fun? I did. I always have fun.

What's your favorite part about living in, what's your favorite thing about living in Boston? Is Boston nice in the summer? No. Okay. Not to me. So I would say the fall. The fall is my favorite. So besides like you go to Duncan and like Matt Damon standing there, like what else do you like about?

What's like the best Boston life thing? The seafood. Because when we went up to see you. Yeah. We loved it. Like what's that neighborhood that we stayed in? Oh, we said,

where do we stay? Right by your offices. What is that called? 245? The ladder? Yeah. Oh, you're in the seaport.

Yeah. Oh, that's a fancy area. It's all like new buildings. It's beautiful. It used to be parking lots. Okay. So the seafood. So say more.

I think, yeah. No, the seafood. And I would say the seafood purveyors. I'd say the restaurant. Like, I think Boston is... You don't strike me as a lobster roll person. No, I'm not a lobster roll person. Okay, are you?

Why don't I strike you as a lobster roll person? What a lobster roll people are like? Yeah, we just met. I love the pistachia canoles at the North Carolina. Oh, yeah. Is it Mike's? Oh, absolutely. Mike's pastry.

Yeah, yeah. The Italian food's great. What's the best seafood dinner in Boston? Oh, in Boston. No, I would have to say my husband's cooking. I have to say, yeah. Yeah, good to him. Good answer.

All right. We loved having you here. Thank you so much. I want to let people know that you are doing research for Fidelity. A lot of the stuff that you do makes it out into the public eye. Tell people where they can find more Denise Chisholm. Yeah, you can find it on LinkedIn. So I do share charts of the week and you can subscribe to the newsletter.

That way it comes right into your email box as opposed to sort of filtering it through. I also write a monthly white paper. I also do my own, not like you all do, but a podcast. called Market Insights at Fidelity. They let me talk. They let me talk. But it's just me talking. Like a hostage situation?

It is a hostage situation. But it's good, though. But no video. So just me talking. So for those who don't consume my research from a, not everybody likes to read. So for people who like to listen. And I also do a quarterly webcast for clients that is the quarterly sector and investment

research. So Fidelity clients can get access to that. Okay. Well, we think you're magnificent. Thank you. You can come on our podcast anytime you want. You can do video with us. Thank you so much.

Guys, follow Denise Chisholm on LinkedIn and check with your Fidelity Rep for why you're not getting her research. It's very good. All right. We had an awesome time on the show this week. We did it all. Right?

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