Remy Blaire: While macro headwinds like triple digit oil, elevated yields and Fed rate hike expectations dominate the headlines, corporate earnings are quietly outpacing equity gains so far this year, with S&P 500 earnings up about 25% and tech profitability surging 50%. P/E multiples are actually lower today than at the start of the year.
And as Wall Street prepares for Fed Chair Kevin Warsh and the Federal Reserve, investors are weighing whether a resilient economy and an expanding AI CapEx flywheel can continue to overpower higher borrowing costs.
Well, joining us live here at the New York Stock Exchange to break down market micro versus macro dynamics and portfolio allocation is Scott Ladner, CIO at Horizon Investments. Scott, great to have you here. Thank you so much for joining me.
Scott Ladner: Hey, Remy. Nice to be here. Thanks.
Remy Blaire: Well, we are here in midday as the two day September Fed meeting kicks off. And there's a lot of anticipation over the next 24, 48 hours. But when we're looking at what's happening with the major stock averages as well as earnings, tell us why P/E compression is so key here.
Scott Ladner: Well, I mean, one, it is making stocks cheaper right now. I mean, so, like, nobody looks at this market right now, or I would guess, like, many of our viewers now looking at this market, think things have gotten cheaper this year or cheaper over the last 12 months.
Everybody thinks, like, we're in a bubble. I mean, like, I get questions when I give speeches to clients, like, all the time about, is this an AI bubble? It's like, well, you can't have a bubble if earnings are up more than the stock prices. I mean, it's sort of the opposite of a bubble, right?
And so, you know, we're just in an environment right now where the micro parts, like earnings, are just completely dominating what are some pretty significant macro headwinds.
So I think we just have to understand that that is the place where we are. And so what the Fed does tomorrow, you know, like, where the likely hike is, you know, it'll matter some.
But really, the story continues to be for this market for the next, really, probably the next 12 months is just going to be, can companies keep on this earnings path that they've been? And we think they can.
Remy Blaire: Yeah, that is the big question here as we head into tomorrow's meeting, of course. But when we take a look at Treasury yields as well as nominal GDP, give us your perspective, especially as we're looking at the 10 year hovering right around the 5% level.
Scott Ladner: I know this is really scary, right? Everybody looks at these 5% 10 years and thinks the world is about to end. And I do want to bring a little bit of perspective on this, right?
Because when you look at a 5% 10 year and you think that's really, really high, it is relative to, like, the last 15 years or so. It's not, obviously, if you go back a little bit further.
And the unique dynamics of what was going on basically from the financial crisis in 2008 until COVID hit in 2020 is we had nominal GDP growth in this country around 4%.
And since COVID has happened, with the AI buildout that we've had the last few years, that nominal GDP has gone from basically 4%, 4.5%, to about 6.5%.
And as we all know, like, you know, long term yields are really tied to what nominal GDP growth is doing.
So when we had 2.5% yields in the 2010s with 4% nominal GDP growth, now we've got 2.5% higher in nominal GDP growth. It makes a lot of sense if we go from 2.5% in 10 years to 5% in 10 years.
It's just not that big of a deal because we have higher yields for the right reason, meaning higher growth. That's actually a pretty supportive backdrop for stocks.
Remy Blaire: Yeah. And speaking of the U.S. economy, of course, we're focused on what Chair Warsh is going to say tomorrow afternoon after the rate announcement.
So not only do we get the rate decision at 2 p.m., but we get the press conference as well as the Summary of Economic Projections here.
So give us your take when it comes to what should be happening, especially given credibility concerns for the central bank.
Scott Ladner: Yeah. Look, to be clear, I don't think the Fed really needs to hike in order to rein in inflation. Inflation is starting to come down on its own. It has been for a while. It's just kind of slow and choppy. And obviously higher oil prices are not helping that.
So I guess the political backdrop, and I understand why they will. I don't think it's a horrible decision. I don't think it's necessarily the right one.
That said, they are going to hike tomorrow. It's in the price. He's not going to surprise markets this early in his tenure.
And so after the hike, though, the thing that the market will really be looking for is during that press conference, you know, can he not put his foot in his mouth, essentially?
You know, like Fed chairs, new Fed chairs, have a hard time communicating. They almost all do. These first few months can be pretty tough. And Warsh wasn't, you know, he was not immune to that. His first couple. Jackson Hole was a little bit better. We hope this one continues to get a little better.
But I think what we're really going to be looking for is, is he characterizing this hike as the start of a hiking cycle or more of, like, a kind of classic mid cycle adjustment?
I mean, like, if we hear the words "mid cycle adjustment," stocks are going to scream. If we hear "the beginning of a hiking cycle," it's going to be the opposite story.
And so, like, how he characterizes what the move is and sort of, like, what the future looks like, even though he's not a big forward guidance fan, you know, if we get a sense of one of those two sort of outcomes, that's going to matter a lot.
Remy Blaire: Yeah, Scott, as you mentioned, there's a lot of anticipation as we head into tomorrow afternoon, and for some, perhaps trepidation.
But I do want to get your perspective when it comes to AI CapEx and also a trickle down risk here. So what should we be paying attention to when it comes to the AI trade?
Scott Ladner: You know, the AI trade is obviously the driver right now. It has been and will be for the next at least 24 months.
We think this CapEx cycle is incredible, and it is trickling down throughout other sectors as well.
So if you think about what AI CapEx is, people think about semiconductors. Like, it's a great starting place. But if semiconductors go in data centers, you've got to build these data centers.
You need construction machines to do that. You need to build roads. You need to build infrastructure. You need to get water. Like, there's all sorts of things you have to do in order to make the data center actually run.
And so the trickle down aspect of, you know, AI CapEx going into other industries is real.
And so if we do get a slowdown in that, that obviously is going to crimp GDP growth. It's going to crimp corporate earnings growth.
You know, that slowdown is not something that we're necessarily looking for. But obviously the news over the weekend, you know, with everybody's, like, having these safety fears and robots are going to kill us all sort of scenarios, is not helpful towards that.
It's like, look, we're watching it. It's not our base case right now because we do think the future is the future, and you can't sort of shy away from that. But it's got to be on your mind.
Remy Blaire: Yes, indeed. We will be hearing from many leaders, both political as well as corporate leaders, when it comes to the AI play as we head into the upcoming weekend.
Of course, when it comes to AI, I understand you have a valuation framework, the AI as a utility framework. So can you walk us through this?
Scott Ladner: Yeah, look. And this is a risk, too. So, you know, this is something that I don't think is a huge risk, but it's something that we should start thinking about.
And it comes from the idea of the population, or people generally, starting to think about intelligence as being a public good.
So, you know, we think about electricity as being a public good. We think about water as being a public good. You know, there are things that we just think about as, like, everybody's got a right to them.
Well, if intelligence, per se, becomes, like, such an important part of people's lives, it's such an important part of people's work, you know, like workplaces do, we start thinking about intelligence being kind of a public good.
And if you do, then that brings into the light, it just introduces a regulatory framework for the producers of that public good, producers of intelligence.
So this is the OpenAIs and the Anthropics of the world that is not really contemplated in the market right now.
You know, like, utilities don't trade like tech stocks. And that distinction, like, might end up being more important as we come through the midterms, when we come into 2028.
This is not going to get quieter. It's going to get louder.
You know, having that in the back of your head about, like, if we start thinking about intelligence as a public good and therefore a sort of regulated utility framework, that's going to change the way we have to think about valuations for some of these, you know, for some of these, like, OpenAIs of the world.
And that's, you know, it's on our mind. Again, it's not sort of base case stuff, but it's definitely on our mind right now.
Remy Blaire: Well, Scott, we will have to leave it there. But a lot of food for thought as we head into this noon hour. So appreciate your time today. Thank you so much for joining us.
Scott Ladner: Thanks, Remy.
