00:00 Speaker A
Adam, great to see you as always. Some of your broader views of the market.
00:03 Speaker A
Uh, straight Hormuz is effectively closed. Yeah. World prices have shot higher, gas prices have shot higher, and the stock market just powers through all of it. How come?
00:08 Speaker B
Because we have 26% earnings growth. Figure that, Josh.
00:12 Speaker A
26%. One of the most impressive I can remember.
00:15 Speaker B
Yeah, that’s actually the strongest since uh mid 2022, you know, coming out of COVID. And I’ve been so thrilled about the 13% growth that we’d had for the preceding three quarters and now 26, which is double that.
00:30 Speaker B
So we have had six consecutive quarters of double digit gains. Again, 26% for this most recent one. Uh that’s accompanied as well by record profit margins. about 13.5%. They’ve never been that high.
00:41 Speaker B
Which by the way, I think is an early return on our AI investment, right? Increase productivity. So, we have tremendous earnings growth. We have very solid uh job growth. I know that there were a couple of months in there where people started to question whether we had job growth.
00:54 Speaker B
But if you look at the four-month average of the number of jobs created in this economy, um, it works out to about 140,000 jobs per month. Again, four-month average. That’s quite strong.
01:05 Speaker B
And, um, finally we have economic growth. We have GDP growing somewhere, I think in the threes. Uh Kevin Walsh thinks it could go as high as uh five, so does Kevin Hassett. Um, Besant thinks it’s in the fours. The Atlanta now forecast dipped down to two and a half. I think it’s somewhere in the threes. That’s very consistent.
01:21 Speaker B
The 30-year average for GDP is 2.9. So we have earnings growth, we have job growth, we have economic growth, which means that all these other flash points like Iran, like Ukraine, like Taiwan, like tariffs, etc. even uh inflation uh today, which was scary. Uh all that’s taking a back seat to very strong growth.
01:42 Speaker A
The earnings growth we we’re seeing here as solid as it is. Does that continue Adam? What do you see in the quarters ahead? What do you see in the quarters ahead?
01:49 Speaker B
I can’t see what would necessarily derail it and I don’t mean to sound like a pollyanna by saying that. But if if I look at the continued gains in productivity that that companies have been posting uh month after month. The only hurdle that I see is inflation and I think they’re working through that.
02:08 Speaker B
The supply chain issues don’t seem to be affecting the US the way they are. and supply chain by the way because of Hormuz. uh whether that’s fertilizer, oil, etc. Um, Europe is the region, well, Europe and Asia are the regions that have the most problem. Uh thankfully, the US doesn’t.
02:22 Speaker B
And technology is just so strong, Josh. I mean, all the big guys, right? Um uh Google, Amazon, on and on. They just keep putting up 25 to 35% growth.
02:35 Speaker B
So, uh as long as they keep doing that and they’ve proven that they can do it quarter after quarter. I know CAPEX for AI is high, but they’re generating so much cash flow because they’re growing um so quickly that I I think they can weather that. I think they can weather the CAPEX.
02:51 Speaker B
There’s very I again, I don’t mean to sound like a Pollyana. There’s very little that says, the only one thing I would say that is an issue is um uncertainty around the midterms. and if because of high gasoline prices, we start to see a blue wave cresting in in June and July as people are driving their cars and realizing, oh my gosh, gas is so expensive. That will impact Republican’s ability to get re-elected. And that kind of change, potentially, the market hates change. That could derail the the the market.
03:22 Speaker B
But I don’t think there’s anything within the economy that could derail the market.
03:26 Speaker A
How would you broadly characterize valuations?
03:29 Speaker B
I’m okay with valuation. Um there’s been a lot of and when I say that, what do I mean by okay? Well, the S&P 500 trades at about 22 times earnings. The bull market range for the S&P, and I’m talking forward earnings by the way. The bull market range when we’re in a bull market, the S&P tends to trade at somewhere between 18 and 24. Again, we’re at 22.
03:47 Speaker B
So we’re we’re well within the range. So that’s why I say I’m okay with S&P 500 valuation.
03:54 Speaker B
If I look at the semis, there’s been some talk where they’re awfully expensive. Semis are always expensive. The one that’s not is Micron.
04:02 Speaker B
Micron trades at 10 times earnings.
04:04 Speaker A
Which is remarkable when you look at that freak show chart. Yeah.
04:07 Speaker B
Well, it the freak so chart but even even freakier than the um stock chart for Micron is the earnings chart for Micron. I mean, earnings are up like tenfold. So the stock’s only up threefold. That’s why the um price to earnings ratio has compressed because uh the price hasn’t kept up with the earnings.
04:28 Speaker B
I think that the buyside, you know, the guys who are out there, guys and gals who are buying stocks have it right because they want to own Micron and the sell side just can’t wrap their heads around the fact that it’s going up so much.
04:41 Speaker A
Yeah, the moves you’re seeing. I mean, we could talk Micron, Intel, Sandisk, these are remarkable moves. When you look at these moves, like just like you pull up the chart of the SMH off of March 30 low.
04:52 Speaker A
Is that 1999 or no? People who say that are way off. Why?
04:55 Speaker B
No, because well, we’re just say, I mean Nvidia trades at um 23, 24 times earnings. Think about it. So the S&P trades at 22 times earnings and is growing as we’ve just learned, uh 26%.
05:08 Speaker B
Okay? Well, Nvidia trades higher, 24, 25 times earnings, but it’s growing at 80%. So actually, I would argue that Nvidia is quite cheap. As long as these companies can continue to put up the growth, and I believe they will because the demand for AI is so extreme.
05:22 Speaker B
The demand for computing power and that necessitates semis and the whole ecosystem around that. Um, uh, I’m very comfortable with uh current valuations.
05:32 Speaker B
Remember Josh, back in 1999, in fact, John Chambers, former um, CEO of Cisco famously said, yeah, people are paying 70 times sales right now, uh, for my company. He said, forget earnings, uh that’d be couple hundred times. Uh, he said they’re paying 70 years worth of revenues just to get to the market cap of my company.
05:54 Speaker B
Again, that’s the CEO of Cisco. He’s saying, that’s crazy.
05:59 Speaker B
So John Chambers then was telling us, this is crazy and unsustainable. Uh no CEOs are saying that now because they see the growth and they see the valuation levels. And look, I am someone who makes a living picking stocks for my clients. And I look at those valuations and I’m very comfortable with them because of the growth.
