Loading summary
Transcript49 lines
- [00:00]
A
This episode is sponsored by hpe. Today's networks must evolve from simply providing connectivity to harnessing AI to deliver exceptional connected experiences. At the break, HPE's Rami Rahim shares how self driving networks can make that happen.
- [00:18]
B
The reason stocks are cheaper is because somebody's gonna say, I'm not gonna pay a multiple on the best year ever for a company's earnings. I'm gonna look at what is kind of their trend over the next few years and I'm gonna pay to buy that trend. So the stock are not reflecting, you know, this phenomenal earnings this year. It's actually projecting something that's much more even.
- [00:42]
A
Hello and welcome to the Baron Streetwise podcast. I'm Jack Howe and it's earnings season. And the voice you just heard, that's Jonathan Gollop. He's the chief equity strategist at Seaport Research and he's going to tell us what to expect. The earnings growth rate looks to me, I don't want to say rapturous because I use that word too much. Did a lot of Sunday school as a kid. Let's call it euphoric. We'll talk about that. We'll also hear about rising bond yields and what it means for income investing from someone who oversees about $80 billion. Let's get into it. Listening in is our audio producer, Emily Sumlin. Hi, Emily.
- [01:29]
C
Hi, Jack.
- [01:30]
A
I've got, I've got good news and bad news. The good news is for you, the bad news is for me. I did not expect to ever fall out of billionaire status, mostly because I never expected to rise to anything close to billionaire status. But it turns out I've fallen out of it and I didn't even notice. And it was pointed out to me recently by Deutsche bank, they sent a report that caught my eye called Time Billionaires Want More Risk Is AI to Blame. And I thought, what's a time billionaire? It's somebody who has a billion seconds left to live. And that's a fancy high concept rebranding of something. That's a pretty simple concept and I love those. I saw one recently where if you, you know, work when you have good energy, but then when you get tired, you take a break. I mean, that's something that all of us do anyhow. That's circadian management. You're practicing circadian management if you do that. So I like a fancy term. The problem with this one is it made me immediately curious, am I a time billionaire? And I got to tell you, it's not a happy result. I Did some fancy figuring with the. What the actuarial tables say about how long people live. And I gave myself every benefit for, you know, things that would push my number higher, different socioeconomic factors or where you live or those sorts of things. And I didn't penalize it at all for anything about me that could pull my number lower. So I really wanted to give myself as happy of a number as possible. And it turns out I'm worth about 938 million. Not. I'm short of billionaire status. I got immediately curious about. This is the kind of rabbit hole I go down when I read something like this. When exactly did I fall out of billionaire status? What was the moment? I should have known that this was happening, and I should have been paying attention and taking stock in my life and making sure that I'm making the most of every moment and doing all the right things. So what was the exact date? And I looked it up and I was able to figure it out. And then I wanted to know what exactly was happening in the world that would have commanded my attention on that date? I'll tell you the date, and you try to guess. It's not going to be easy, but see if you can guess. What was the thing that had me absolutely fascinated on that day? The day was August 9, 2024. About two years ago. August 9, 2024. What do you think happened that day?
- [03:58]
B
JLo put out a hot new single.
- [04:01]
A
You're actually closer than. Well, J. Lo won't like this comparison, but you're. You're closer than you might think. This was during the Olympics, and you might recall that they had breakdancing for the first time in the Olympics. And there's something called. Something called the B Girl competition. B Girls competition. I don't know what a B Girl is, but one of the contenders was a woman named Rachel Gunn. G U N N. Her nickname is Ray Gunn. And she took the stage at the. This is in Paris, the. I don't know how you pronounce French things. Place de la Concorde, something like that. And she. Did you remember that routine? She was wearing, I think, this sort of green running suit. And she did the kangaroo hop. And there were the floor rolls and the different things. And I thought it was. I thought it was quite creative. And she went viral almost instantly. Remember that Ray Gun?
- [04:53]
B
How could I forget?
- [04:55]
A
Yeah, that was. That was what I was watching when I slipped out of billionaire status.
- [04:59]
B
You died the way you lived, Jack.
- [05:05]
A
I'll tell you why I bring this up. There are some interesting Things here that don't have to do with breakdancing. Deutsche bank put out this report based on a study and surveys and they basically wanted to say, what are the young up to? What are they thinking? What are they doing? Young investors, they looked at the US and the uk. I'm going to give you just a few bullet points that I found interesting about what these time billionaires are thinking right now. First of all, they find that the younger the age group, the more they say that they will increase their risk over the coming one, three and five years. Think about that. We think about the young as taking on a good amount of risk, more risk than the old. And so they should. That's part of the deal. When you're young, you have longer to recover. But this is saying that whatever their starting point for risk, they're looking to take on more. They also find that the young show a strong desire to move to an AI managed investment method over the next one, three and five years. This is especially the case in the us. I think AI is a great resource for getting questions answered. Not trying to put our little podcast here out of business, but you know, if you have a question, you can record it on the voice memo app on your phone and you can send it in here to Jack. How H O u g h barrons.com and we might get around to it. It might be featured on a future episode and you'll hear me ramble through for five or so minutes about the topic that you've asked about. Or you can just go to like ChatGPT or Gemini and get an answer in a second. But then the whole audience isn't going to get to hear your voice and your brilliant, life changing question. I'd say don't do it. Stick with the podcast. But you get the point. What was the point? I forget the point. Oh, I know young people relying on AI, but we're not talking about just answering questions. We're talking about to make trades on their behalf in their investment account. Deutsche bank writes that Americans up to 34 years old are happy giving AI responsibility for automatically executing trades on their account by a 10 to 1 ratio. I think if you're in the financial advisory business and you're seeing that, you've got to be thinking about ways to put AI on your side rather than competing against it. One more thing. Deutsche bank finds that younger people are overwhelmingly confident of strong returns across the next one, three and five years. I think if you had to pick a steady state, you should try to choose optimism. When people ask me what's the market going to do over some short time period. I tell them I don't know, but if I had to put probability on my side, I'm always going to guess up because the market tends to rise more than it tends to fall. But overwhelmingly confident over the next one, three and five years, I don't know if I would want to invest like I'm overwhelmingly confident. I want to invest like I'm optimistic and ever so slightly terrified. The report mentions what it calls dream scrolling on social media and that fueling sky high expectations for Gen Z. Gen Z apparently thinks it needs a much higher level of wealth than previous generations to achieve financial success. Twice as much wealth and triple the salary. Maybe high housing costs have something to do with that. The report authors write about younger investors coming of age in a market culture shaped by mobile trading, social media, crypto assets, zero commission, brokerage, online financial influencers and rapid cycles of boom and bust narratives. It says investment decisions are discussed, compared, gamified and sometimes celebrated in digital communities. This can make risk taking feel less isolated and less exceptional. In turn, this amplifies psychological issues of social proof hurting and fear of missing out. In the end, the emotional cost of failure is lower. I like the thought that all you time billionaires out there are saving early and getting ample exposure to the stock market for the long term and that you're confident in returns. I don't love the thought of gamifying and gambling and crypto flipping and straying too far from things that are proven wealth builders over time. Take it from a former time billionaire. Use this opportunity while you can. You will reach a moment in your life where the metaphorical Australian breakdancer will kangaroo hop you down to nine figures from ten like me. And you'll have to start thinking a little differently about risk. Take full advantage while you can. Emily. You're surely a multi billionaire over there. How does that make you feel? Are you thinking about wearing a top hat and monocle to boast to others about your multi billionaire status?
- [09:39]
B
You know, I might do the monocle, but I'm going to draw the line at the mustache.
- [09:43]
A
Nice. Let's get into earnings. It's earnings season. We're going to hear about second quarter results. They've already started rolling in. The numbers are really striking. If we if we go back to the end of last year and we look at published analyst estimates, what they say about the earnings growth rate for the second quarter of this year, what analysts were expecting, they were predicting 14% earnings growth for the second quarter. And I like to think if you'd have told me that number back then, I'd have said, no problem, we'll do that a lot more. But I might have also said, you know what, analysts have a record of being overly bullish when they put those distant forecasts out there. And what they tend to do as earnings season approaches is they slash their numbers and then companies beat their numbers and you end up with maybe something lower than what they were saying at the end of last year. But in fact, the opposite has happened. Estimates haven't been falling, they've been rising. And companies have been beating estimates by preposterous amounts. And the latest forecast for s and P500 earnings growth for the second quarter, now that results are partway in, it's 24%. That is an astounding result. It's the kind of number that can justify the run up we've seen in stock prices. And so I wanted to learn more about the underlying trends and where things stand, what we're expecting. Longtime listeners will probably remember Jonathan Golub. He's the chief equity strategist at Seaport Research. I reached out recently to talk about earnings. Let's hear part of that conversation now. Jonathan, talk to me about earning season. There is, I was reading one of your reports. There's usually this thing that I've described as a sultry tango between companies and stock analysts where they lower expectations heading into earnings season. And then the big day comes and companies report results that are solidly better than these lowered expectations and they jump over the bar with a rose in their mouth and everyone shouts olay. And this time we might get the olay, but we haven't had the lowered bar. I understand what is happening. That's different from normal this time.
- [11:48]
B
Okay, so let's first talk about why is it that the earnings estimates decline going into reporting season. There's this unofficial rule, or I guess a norm, if you will, that companies, if they have bad news to tell, they tell it in advance of reporting season. So they have a lawsuit or they're closing a store or some product that they were going to initiate and it was delayed. They get that bad news out early and then the stock prices adjust or, but or it's removed from the earnings report. And then when you have the earnings report, you're kind of, you've pre announced the bad news. So when you have a situation like this where the stocks don't dip, which is what's happened this earnings season, what it really means is there's not that much bad news. And so there wasn't that news, that bad news to get out early. And not only does that say really good things about the environment going into earnings season, but it also is a pretty good read that the earnings season is going to be a good one because you have even more good news than normal.
- [12:58]
A
It looks maybe better than a good one. I see maybe 20% plus growth. What's the latest thought on what the earnings growth trajectory might look like for the second quarter?
- [13:11]
B
Yeah, so right now the consensus expectations are for 24% EPS growth. So if you basically take all the Wall street analysts who cover all these companies, you add them all up, you get about 24% growth. However, you typically are going to beat that number by about two and a half percent. So let's say 26 or 27% growth is what we're likely going to finish at. And the other way to look at this, which I think is the way a Wall street guy would, would look at this, is how much a company is beating expectations by. We don't, we don't care that the earnings growth is high or low. We care about how much better they're coming in than expected. We are beating by 15 and a half percent so far. I can't even describe how good a number that is. Maybe a normal is a 4 to 5% beat. And this is just, I've literally never seen anything like this other than the first quarter coming out of a recession.
- [14:10]
A
And how much of that is related to AI and the data center build out? Is there a part of that that's, that's not related to that?
- [14:20]
B
First of all, I would argue that an awful lot going on throughout the market and economy are related to the build out of AI data centers. Even the stuff that doesn't appear to be. So for example, the real big surprise so far because the banks report early in earnings season, it's kind of a cadence there. And the consumer stocks report at the end and there's, you know, there's, there's a, there's a process. The financials which report early just demolish expectations. These are all the big banks. Now why is. Because they're lending money for the data centers or they're lending money for businesses that are ultimately seeing strong demand because of this data center build out and the IPO activity is strong and bond underwriting is strong. All these things which you can say, well, these are banks. But no, the ecosystem is being supported by this activity which is helping to boost the banks. The other thing which is the Most important thing for bank earnings is always are people paying their loans. And so banks reserve for that and they set money aside so that they're not caught off guard and they have plenty of capital. And right now they don't need to set that much money aside or as much as they would have thought because the loan repayments now is that because of the AI trade? I would argue some of it's a good economy but even that's because of the AI.
- [15:46]
A
What does that mean? Is that okay? I mean it's okay to have this, this thing that might not last forever, that's this temporary huge growth driver but we don't want to see a collapse of it at any point and we want for the rest of the economy to be strong and sustainable. What does the overall picture look to you? Are we in good shape right now for, for long term investors?
- [16:11]
B
Yeah. I mean the economy is expected to grow right now a little bit over 2%. And so that, that's a number that's pretty typical for a, you know, if you take out recessions and said what's the average GDP growth? That that's, that's about right. Job creation is robust but the numbers aren't so big that you start to say it's going to be hugely inflationary ism, which is this indicator on businesses their intention to spend and it's in the low 50s which means they're solidly in the camp that they're going to continue to spend. But you're not seeing just wild, broad based expectations on building out businesses that would be inflationary or would be unsustainable. So I think Jack, it's actually a pretty healthy, robust kind of environment. But I don't see broad based signs of overheating or something that's broadly problematic. But that said, we are investing lots of dollars in these businesses and it's an important part of the economy. But it's not the only thing.
- [17:30]
A
Thank you, Jonathan. Let's take a quick break there and we'll come back with more on earnings and the market. With Jonathan Golub, Here's Rami Rahim Hpe, Executive Vice President, President and General Manager of Networking.
- [17:48]
D
A self driving network is a network that essentially configures itself. And what used to take months, maybe up to a year to deploy can now take weeks, if not days. A network that optimizes itself and very importantly a network that heals itself.
- [18:09]
A
Here's Ramirehim Hpe, Executive Vice President, President and General Manager of Networking.
- [18:14]
D
A self driving network is a network that essentially configures itself. And what used to take months, maybe up to a year to deploy can now take weeks, if not days. A network that optimizes itself, and very importantly, a network that heals itself.
- [18:41]
A
Welcome back, Emily. I do have an entertainment note if you're looking to do some Netflixing and you need a recommendation. Earlier I mentioned Rachel Gunn or Ray Gunn. I can tell you that she has stepped out of the competitive breakdancing spotlight, but she will be returning to the global stage via Netflix. There's a documentary series on Netflix called Untold, and Ray Gun is the subject of an upcoming episode. It's titled Untold. Ray Gun Breaking Badly. I know that's a playoff of Breaking Bad. I'm not sure I love it. First of all, was the kangaroo hop bad or was it ahead of its time?
- [19:17]
B
Well, we time billionaires will be the only ones to find out.
- [19:21]
A
It's going to take a while. If it does catch on, you're saying it's going to take a while.
- [19:25]
B
Billions of seconds will go by before
- [19:26]
A
that comes into the cultural zeitgeist. Okay, fine. I can tell you that the Ray Gun episode premieres on Netflix September 1st. I don't know what I'm doing giving these people a plug. They don't need my help. If it wasn't for Ray Gun, I wouldn't do it. But there you have it. Now, we were talking about earnings with Jonathan Golub over at Seaport. Let's get back to that conversation. Now, is there anything that you see on the horizon that gives you concern? People are very happy with the stock gains they have had in recent years. And some of us who've been at it for a while are left with a sense of, you know, you always feel like, has it been too much too fast? Have I got it too good right now? It feels too good. So there must be something bad around the corner. Is there anything that you have your eye on that, that that is concerning?
- [20:15]
B
This is general assumption. The stock market's gone up too fast and therefore that's a problem. And there's this general belief that the stock market's up there for stocks much maybe more expensive. I mean, if you go buy that fancy shirt that you're wearing and you and you and you, and tomorrow, it's not, you know, it's not $30, it's $35, the shirt's more expensive. But if you buy a stock for more money, it's not necessarily more expensive. And as long as the earnings that that stock generates are going up as well, we're seeing year to date that the earnings on the stock market are up about 20%, and yet the stock market, the price is up 10. So if you're getting 20% more earnings and you're paying 10% more, it's not the same as going and buying a car or a piece of clothing. It's cheaper. And I think that that is really missing. Even some of the professional folks who are supposed to know better, who are in the industry are saying it's getting ahead of itself. This idea that something goes too far, too fast. It's not a thing. I mean, it sounds great and it's great for a media headline, but what we really care about is, are the earnings, are they sustainable?
- [21:31]
A
You've got a keen eye for fashion valuation. I think this might be a $30 shirt. I'm going to guess that I got it marked down to 25 or lower, but yeah. What about the investor who's done very well in s and P500 fund, and they're loaded up on an s and P500 fund? Just because so many people are indexing right now and so many people are tracking that particular index. Do you see any problems with that approach going forward with the, the concentration or anything like that? Do you think there's, is there anything that that person should think about to, to balance things out or where do you stand on that?
- [22:07]
B
The growth rate on the S and P, I believe, is expected to come down into the mid teens. And so still you're getting a tailwind from this tech stuff. But it's exp. You know, trees don't grow to the sky and, and you're not going to have 25%, you know, earnings growth forever. But the, the market is expecting to slow. That's already priced in. And, and you know, the stocks, like I mentioned it before, stocks are cheaper. And the reason stocks are cheaper is because somebody's gonna say, I'm not gonna pay a multiple on the best year ever for a company's earnings. I'm gonna look at what is kind of their trend over the next few years, and I'm gonna pay to buy that, that, that trend. So the stock multiples are not reflecting, you know, this phenomenal earnings this year. It's actually projecting something that's much more. Even if you say, well, what about on the other side? What would we perhaps avoid? There's a natural tendency for people who are concerned about how far this has gone to invest in defensive sectors. You're talking about consumer staples and utilities and telephone companies and things like that. And those are actually expected to deliver weaker growth. And I think that you're going to end up disappointed. I think you end up disappointed with those. If you want to get if you want to play for safety, I think you're probably better buying, you know, buying a T bill and then take the portion in the stock market and play to win rather than play to lose in the stock market because you're nervous.
- [23:44]
A
Very good. Jonathan, always nice speaking with you. Thank you for your time.
- [23:48]
B
All right. Take care. Enjoy your summer.
- [23:51]
A
Thank you, Jonathan. Let's turn our attention for a few minutes from stocks to bonds, probably something we don't talk enough about. Not just bonds, really, income, investment income of all kinds. The benchmark 10 year treasury yield started this year at around 4.2%. And over the first couple of months of the year it was headed lower. In fact, it ended February by dipping just below 4%. And a lot of things have changed since then. We had the start of the war in Iran and oil prices moved higher. And that has really changed the conversation from the possibility of lower interest rates to more inflation and now the possibility of higher rates. That 10 year treasury yield that had dipped briefly below 4%, it's now above 4.6%. The long bond, the 30 year treasury, is now solidly above 5%. Might not be a humongous yield, but it's a pretty big move for Treasuries. That and the possibility of higher rates coming. It gets me thinking about what, if anything, investors should be doing differently with their bond portfolios and also how investors should think about the income available on bonds versus that on stocks. And for that I wanted to hear from someone who looks for investment income across all sorts of asset classes. I spoke recently with Todd Brighton. He's a portfolio manager at Franklin Income Investors. So let's hear some of that conversation now. So I guess let's start with the bond market. Yields are higher than we remember from several years ago. Is the bond market broadly a good deal right now or are pockets of it better than others? How does it look to you?
- [25:32]
C
Yields and credit, as you noted, still near the top of the range that we've seen over the last 10 to 15 years. Now that's mostly because treasury yields are higher, right? We've seen spreads contracting, you know, in general for the last several years and they're still very tight versus history across different credit sectors. Treasury yields are, you know, have moved up higher this year as the probability of interest rate hikes has risen. But the spreads have remained Tight. The economy continues to chug along despite all the headwinds that we see in the news every day. So for us, yields and credit are attractive from a carry perspective, given that still constructive macro backdrop. But we do think that price appreciation may be a little harder to come by in credit just given where spreads are.
- [26:20]
A
What do you make of the view, the increased possibility that not only might we not get more interest rate cuts, but there could be hikes coming down the road? Is there anything that you do in particular to position yourself for that? If, if you're, if you're an investor, do you make changes to your bond portfolio? Do you stay short? Do you, do you do anything to protect yourself? Or you think those moves won't really make that big of a difference?
- [26:49]
C
You know, we've seen a, not only, you know, a lot of changes with what cuts and, and increases have come through in the last year, but also what the expectations were. We started the year with expectation for three cuts. Now we're expecting, you know, higher probability of an increase than a cut we've seen. You know, longer term inflation expectations remain pretty well anchored. So investors are still pretty willing to look through, you know, the, the inflation data that's come out over the last couple of months bouncing around. So I think that is still pretty constructive for markets that market based expectations have remained anchored.
- [27:34]
A
Do you think investors put a high enough priority on portfolio income right now? Sometimes I think that. Imagine the fairly new investor who's only been in it for several years, what they must think about, what ordinary returns look like. They're probably out there saying, boy, I hope I make another 75% by Halloween or something like that. So when they, when they hear about, you know, a 5% and change portfolio yield or this, they might be thinking, no big whoop, you know, I'll just stick with my indexes or my semiconductors or what have you. Do you think that investors still place enough of an emphasis on income and how. Tell me anything you can about the proper place of, let's say an income fund or an income strategy like yours. And in the investor's portfolio, is it something they tuck in, in the side to increase their overall yield or how do they use it?
- [28:31]
C
We have seen strong interest, strong investor interest in income strategies and our income strategy over the last couple of years. Despite the really charmed life that equity investors have lived in for the last three years, with 20% +s and p returns seemingly every year, I think that goes back to just how much money has been on the sidelines. Over the last couple of years. Income products, income strategies tend to be one of the first places that investors go when they're moving money kind of off the sideline from those cash money market sort of instruments. So I think it's filled that niche or that, that area for an investor they're looking to re engage with markets, you know, beyond just credit and equity. Something we haven't really talked about is, is convertible securities. And this is an area that we are, we're pretty excited about. Over the last couple of years we've seen some increased issuance within that market. So we had several large deals just over the last couple of months. Google Alphabet had a $16 billion plus issuance. Oracle had a 5 billion issuance over the last couple of months. These are really good sized deals in the convertible market. For a market that hasn't seen a lot of issuance, call it over the last 10 years.
- [30:04]
A
Like household names. I always think of the convertible because the convertible market is so small. I always just think of it as a little weird. Like the, the, the issuer is like, you know, it's, it's kind of a mixed bag. Now these are household names that are issuing these bonds. So the deals are good.
- [30:19]
C
Yeah. And these are companies that have been challenging for income investors to really get access to over the last couple years. Really more growth oriented companies had low or no dividend yield on their common stock. Obviously some had bonds but that's a very different kind of risk and reward profile. So really having them come and they were both convertible, mandatory preferred. So this does give you upside, equity participation above, above the upper strike. So it allows income investors to get exposure to some of these growth year oriented themes within the market while collecting a pretty healthy coupon along the way. So everything we're hearing and seeing from the market is we should see continued issuance within convertibles which, which we think is just another potential opportunity for income investors out there in the market.
- [31:25]
A
That's a good idea. And thanks a lot for taking the time to speak with us. I appreciate it.
- [31:30]
C
Thank you very much Jack.
- [31:32]
A
Thank you Todd and thanks to Jonathan and of course Ray Gunn and thank you all for listening. Emily Monocle. Yes, but hold the mustache. Summlin is our audio producer. You can subscribe to the podcast if you listen on Apple or Spotify. Write us a review. Earnings season continues next week. Emily, Some companies that will be reporting in the week ahead.
- [31:53]
B
Microsoft, Meta, Chipotle and Ford.
- [31:56]
A
Heavyweights, all of them. Also Mondelez, the snacking giant, they make Oreos and I don't want to give out inside information here, but I've been hitting the brown sugar pancake flavored limited edition associated with the K pop band BTS Oreos pretty hard. We'll see if that's reflected in the numbers. Thanks and see you next week. Here again is HPE's Rami Rahim to explain why it's critical for modern enterprises to use AI powered self driving networks.
- [32:35]
D
Gone are the days where humans can keep up with the complexity and overcoming the cyber attacks that are happening using elbow grease. You must leverage agents and artificial intelligence in order to deliver a seamless connectivity experience to everyone and everything. It's not just people that are connected to the network today, it's AI agents. It's billions of things in fact. You can't do this manually. It must be done using artificial intelligence. And everything from the deployment of the network or speed matters to the identification of issues that inevitably happen to the remediation of those issues needs to be done without human intervention.
- [33:20]
A
Find out how a self driving network can help you deliver exceptional user experiences@hpe.com.