JD Durkin: Jessica Inskip, Director of Investor Research at StockBrokers.com, one of our favorite guests and one of my very good friends, joins us now. Nice to see you here, as always.
Jessica Inskip: Happy to see you as well.
JD Durkin: The market is still bullish, but talk to me about what you are seeing with regards to participation in said bullish market. What does that participation tell you these days, Jess?
Jessica Inskip: So when I want to look at broader participation and really breadth, I like to look at more of a larger chart in the 13, 26 and 40 weekly moving averages, which represents one, two and three quarters' worth of prices. We look at the market quarterly because of earnings, right?
What's interesting is the market-cap index has held up those averages, but the equal weight has not. Now, the velocity of the equal weight has been what's been carrying this market as of late until we've had this news. And so, since the equal weight has actually broken down, that is a bearish signal in my mind, where the market is narrowing.
That's not necessarily a bad thing. We want to see broader participation, but that narrowing means that we have risk. We're more susceptible to shocks, and we have to pay more attention to these macroeconomic events. And when they're speaking, coming out with technology headlines and things like that, it has more ability to move the market.
JD Durkin: I know you're also paying attention to what goes on with earnings, rightfully so. Q3 earnings growth estimates climbed to nearly 29%. Give us some context about what that number means to you. Is that enough to keep the market momentum going?
Jessica Inskip: Well, it can be. So a lot of that is concentrated in energy. That's number one. But it's also technology. So that tells me, even though it's narrow, that's where the earnings leadership is, and that's a good thing.
So what I like to look at is price relative to earnings expectations. So we've seen an increase in earnings expectations within the technology sector specifically, but price hasn't followed through. If we were looking simply at P/E, you wouldn't see that story. But if you were to look at the delta differentiation of price versus earnings expectations, you do see an actually undervalued tech sector, even with negative headlines.
But then the real headwind, of course, is yields, JD, so let's get to yields.
JD Durkin: Thank you for—I was like, okay, we're about to get to yields. This is what we're here for.
Bond yields somewhat muted on the long end of the curve, at least for today. That has not been the storyline, kind of bigger picture. At what point do those rising yields become a challenge, an unnecessary headwind for stocks? And how are you thinking about the yield curve today?
Jessica Inskip: Well, I think it is a challenge right now. This is the biggest headwind within the entire market because yields are going to tell us investor demands on the long end. That's going to be investor demands requiring more compensation because of fiscal uncertainty and the larger deficit.
And the belly of the curve, we can see more of the impacts of the oil story. This Iran conflict has not been resolved. We saw the two-year rise more than the 10-year, and now it's kind of—we started with this bear steepening, but now it's flattening, and that can be very concerning.
And that leads me to really what Scott Bessent is doing and moving around with the distribution of the yield curve. So we're moving from the back end of the curve to the front end of the curve. We've got something being voted on tomorrow, which is the CLARITY Act. If we get more clarification on said CLARITY Act, then, in my opinion—he stated this back in November—his job as being a bond salesman is to create that constant demand, understand that demand, but also make sure it's transparent because we need the full faith and credit of the U.S. government.
If the full faith and credit of the U.S. government is under question or scrutiny, that's what's causing yields to react. So if we have this master plan where perhaps we're being innovative and we have stablecoins coming online, which are backed by bills, so the front end of the curve—so if we have a redistribution to the front end of the curve, that is some demand that could be created with broader adoption if we see the CLARITY Act.
So that actually gives me some pause and some positivity with what's happening with yields. But again, that's very speculative.
JD Durkin: That's fair. We'll see how tomorrow goes. Tomorrow's a cloture vote for the Senate, so you need 60 to go in front of the full chamber.
Jessica Inskip: Yes.
JD Durkin: Then you got to deal with the House. We're under 60 days to the midterms. There's a lot going on in Washington, but still, arguably for the industry and market participants, maybe a step in the right direction.
Jess, thanks for being here.
