Remy Blaire: All the major U.S. stock averages are in negative territory as a new trading month gets underway, renewed bond volatility pushing 10-year Treasury yields to 24-year highs of 5.34%.
Meanwhile, in terms of Fed commentary, Minneapolis Fed President Neel Kashkari warning that it remains uncertain how high borrowing costs must rise.
And markets navigating quite a busy week as October kicks off, with September nonfarm payrolls due out tomorrow morning at 8:30 a.m. Eastern Time.
And another macro factor coming up this quarter: the midterm elections. Stocks tend to rally in the nine months following the midterms, and the major averages have bucked the historical trend of volatility leading up to the elections so far this year.
For now, yields and oil remain front and center when it comes to risk factors that could pressure the bull run.
And another blowout earnings report from Micron showing AI demand is still driving huge revenues and justifying strong CapEx in the market.
Well, joining us this afternoon to weigh in is Brian Szytel, who is Co-Chief Investment Officer at The Bahnsen Group.
Good afternoon, Brian. Thank you so much for joining us.
Well, Q4 is officially underway, and we are counting down to year-end.
But with the markets pushing past historic midterm election-year volatility so far, are higher borrowing costs finally starting to crack equity valuations?
And as we head into the final months of this year, what is your market outlook?
Brian Szytel: Well, we've seen market multiples compress already this year.
We started the year at 21 times forward earnings. We're now down to 19 or 19.5.
And it happened in a very orderly way, which is that markets were still up on the year, but they were just up about half as much as earnings actually grew.
So what you're seeing now is, with the Fed looking to follow financial conditions versus set them, you have interest rates now sitting on the longer end of the curve a little bit closer to what actually nominal GDP growth is.
Those aren't necessarily bad things.
But to your question on markets, you need to be more selective going forward through the end of the year and into next year to avoid some of those really overvalued and high-multiple sectors, because with the higher risk-free rate, it's just going to be more of a higher bar to clear there.
Remy Blaire: Yeah. And speaking of which, of course, we're paying attention to the latest commentary coming out from Fed officials.
But yesterday, the Fed's preferred inflation gauge did come in cooler than expected, and today's manufacturing prices paid rebounded sharply.
So does this acceleration that we're seeing in the latest data when it comes to raw material costs eliminate any Fed hesitation on rates?
And given the fact that Fed funds futures are now holding below 50%, what does this mean as we head into tomorrow's nonfarm payrolls?
Brian Szytel: Well, the estimate for tomorrow is about 90,000.
We had ADP private payrolls beat, 90,000 versus roughly 70.
So, you know, it's tough to know.
I'd say anything in the six-digit framework is going to give those Fed futures a boost higher on an October hike, just because, as you mentioned in your previous segment, you do have midterms coming up here.
So you sort of have this do-it-now-in-October or potentially wait until after the election in December.
And you're right, those expectations have come down because of the PCE print yesterday.
But, you know, the number was a little lower, but not, you know, it was modestly lower.
And when you look at core PCE still being at 3% and CPI still being at 2.4%, the Fed has more work to do.
But what they're doing is letting the market and the financial conditions tighten on their own, and they can set policy around that.
So again, that number tomorrow will be a key point on whether those Fed futures move up on an October rate hike.
And we'll have to wait and see. Anything over about 100,000, I think that gets that hike.
Remy Blaire: Yeah, indeed. No question that inflation is sticking around, at least for now.
So tell us about dividend stocks and tell us why dividend growers outperform when risk-free Treasury yields are at 20-year highs.
Brian Szytel: Well, I mean, simply put, you've got a lower-duration asset that's paying you cash today versus a longer-duration asset, like a high-multiple growth stock, where you need to wait 10, 20 years to kind of get paid for the multiple that you're paying to buy it.
So when rates are higher, you tend to have those higher-income-producing stories do better, particularly ones that can grow the dividend every quarter.
And that's what we tend to focus on.
You mentioned Accenture in your previous segment as well. It happens to be a name that we own and had great earnings today, but also still a three-handle yield and one that is growing at close to 14% a year on the dividend growth.
So those types of names, where you get some combination of growth at a reasonable price along with some income and growth of income, in an environment where 10-year yields are at 5.30% and 30-year yields are at 5.60%, it just makes a lot of sense to us.
And it's also something that has been less in vogue the last, call it, four years, and we believe will be more, you know, more in vogue, I guess, the next year coming forward.
Remy Blaire: Yeah. And of course, Brian, when it comes to earnings, we're still digesting Micron's results.
So what do they say about the AI buildout and how it's been driving revenues?
And I do want to get your take on the AI trade as we head into the final months of this year.
Brian Szytel: Sure. I mean, Micron, the report was quite phenomenal.
You know, the AI story is alive and well. There's nothing broken with that.
The amount of productivity that it will drive is still TBD.
But when you have companies like Micron that were already trading at high valuations, again, back to my point on, you know, in this higher-for-longer rate environment, you're just going to get a valuation story that, even with good reports, with the stock priced to perfection, you're still going to have tough days and down days like Micron is today.
But, you know, going forward, when you look at the AI story, some of the sectors have sold off because of the idea of AI really supplanting those business models.
And we feel, if you do research, that you can find good names.
I mentioned Accenture was one of them, where you'll get an AI partnership model versus an AI replacement deal with the IT consulting business that Accenture has, for example.
So I think it's a combination of avoiding the overvalued, focusing on what is still reasonably valued, and then on free cash flow will get you to a 2027 that will be a good year.
Remy Blaire: Well, Brian, I appreciate your time today.
We will have to leave it there for today, so thank you so much for joining us with all of your insights as well as your perspective.
Brian Szytel: Thanks, Remy.
