The Compound and Friends – Episode Summary: "Rest in Peace, CFA"
Episode Information:
- Title: Rest in Peace, CFA
- Release Date: May 6, 2025
- Hosts: Downtown Josh Brown, Michael Batnick, and Cali Cox
- Description: Join Downtown Josh Brown, Michael Batnick, and a rotation of their friends every Tuesday and Friday for expert insight and hot takes on the latest in business and investing.
1. Introduction and Personal Reflections
[00:55 - 02:00] Michael Batnick opens the episode by greeting Cali Cox and sharing a personal anecdote about Josh Brown's family, setting a warm and relatable tone for the discussion. Although there’s a brief mention of sponsor content from Grayscale, this segment is quickly bypassed as the hosts dive into substantive topics.
2. Q1 Earnings Season Analysis
[02:00 - 07:56]
Overview of Q1 Performance Cali Cox provides an insightful analysis of the Q1 earnings season, highlighting that S&P 500 large-cap companies reported a robust 12.5% year-over-year earnings growth. She emphasizes the importance of guidance over actual numbers, stating:
“For every earnings season, by the way, the numbers are important, but the guidance is even more important because the stock market looks 10 steps ahead. It doesn't look behind, it never turns back.”
[03:28]
Optimism vs Reality While the initial earnings figures are encouraging, Cali expresses caution about future projections. She notes that despite strong Q1 results, expectations for Q2, Q3, and Q4 remain exceedingly high. This discrepancy between past performance and future expectations could signal underlying vulnerabilities.
“Expectations are still really high. Because you have to remember, Michael, in a recession, earnings tend to drop. They've dropped an average of 20%. And I don't think talking about a recession is out of the question for this year.”
[05:13]
Michael echoes these sentiments, questioning the optimism embedded in current earnings projections and suggesting that analysts may be overly optimistic.
Impact of Guidance Practices The hosts discuss how many companies are maintaining or splitting their earnings guidance amid high uncertainty. Cali criticizes the reporting practices where bimodal guidance (e.g., "If recession happens, here’s our outlook; if not, here’s another") is categorized as neutral, potentially masking the true volatility.
“That's not exactly the case. So I don't know if David's getting the same data as me, but I, I don't know if this data includes all the companies that are like doing the funny business thing and saying we're not really going to answer things could be okay if certain things happen.”
[07:56]
3. The Mag 7 vs. S&P 493
[07:56 - 16:34]
Valuation and Performance Michael introduces analysis from Yarion Timur at Fidelity, discussing the “Mag 7” – a group of major tech stocks – and their valuation metrics compared to the broader S&P 493. The Mag 7’s trailing P/E ratio has decreased from 43 to 27, and their forward P/E from 40 to 25, making them only a third more expensive than the broader market.
“This really is just an incredible chart to stare at. Wow.”
[14:14]
Earnings and Revenue Growth Further analysis reveals that the Mag 7 are experiencing record-high forward profit margins at 26.2%, significantly outperforming the S&P 493’s 11.9%.
“And this is it, right? Is it just as simple? We're like trying to figure out, like, how is the market, you know, only down 5% year to date and. Well, it's because these stocks.”
[14:24]
Sustainability and Risks Cali raises concerns about the sustainability of the Mag 7’s performance, especially given their heavy global exposure and potential impacts from tariffs and international costs.
“But how much pain we're going to feel… if expectations or if reality does come down really fast, then tech stocks are probably going to get hit the hardest.”
[15:32]
4. Retail Investor Behavior vs. Market Sentiment
[16:34 - 47:36]
Divergence Between Sentiment and Action The discussion shifts to the contrasting behaviors between Wall Street sentiment and retail investor activity. Despite exceedingly pessimistic sentiment indicators, data shows a surge in retail investment and trading volumes.
“The Mag 7 has been significantly derated over the past nine weeks… that's the long, long-term. We are, you're looking at the two week rolling net flow. And they bought the shit out of the diploma once again.”
[39:28]
Net Deposits and Trading Activity Cali and Michael analyze data from Robinhood, noting record net deposits of $57 billion over the past 12 months and a significant increase in trading volumes across equities, options, and crypto.
“Trading Q1 trading volumes increased double digits year over year. We're looking at equity notional volumes up 84% year over year. Options contracts up 46% year over year, and crypto just skyrocketing.”
[45:31]
Psychological Factors and Market Resilience Despite bleak sentiment, retail investors continue to buy the dip, driven by a strong job market and increasing net deposits. Cali attributes this resilience to consistent consumer spending fueled by employment stability.
“You have friends and family who have lost jobs. The pizza place down the street is closing because it can't handle costs... We were all worried in April. Cali: I haven't felt great about it for a while.”
[40:30]
5. The AI Revolution and the Decline of CFA
[25:05 - 31:23]
AI’s Impact on Financial Analysis An audio clip featuring Eric Schmidt underscores the transformative potential of AI in financial services, predicting the automation of roles traditionally held by junior analysts. Michael highlights the launch of "Where's My Doc? Rogo," an AI tool aimed at automating investment banking tasks, correlating this with a significant decline in CFA test-takers.
“It's RIP, rest in peace CFA.”
[25:22]
Cali’s Perspective on Human Analysts Cali emphasizes that while AI can handle data-driven tasks, human analysts bring invaluable contextual understanding and emotional intelligence that AI currently cannot replicate. She stresses the ongoing importance of human analysts in connecting data dots and managing complex psychological factors in investing.
“I think you're finding that more and more, especially in the world, in a world where there's such a big divergence... human analysts have a role.”
[28:27]
6. Federal Reserve Policy and Rate Cuts Expectations
[31:23 - 37:59]
Current Fed Stance Cali and Michael delve into expectations surrounding the Federal Reserve’s policy on interest rates. Data indicates that Wall Street anticipates 3 to 4 rate cuts by year-end, although immediate changes are unlikely.
“The Fed's in a really weird position. It's between a rock and a hard place.”
[34:11]
Stagflation Concerns Cali introduces a chart from Fed projections showing that a majority of Fed members believe inflation and unemployment will move higher before they move lower—a classic stagflation scenario, adding complexity to Fed decision-making.
“So I take this as, you know, the Fed has no idea what's going on. And if they're stuck in this cloud of uncertainty, they're probably going to do nothing.”
[36:12]
Implications of Fed Decisions Michael and Cali discuss the risks of premature rate cuts versus delayed cuts, with Michael arguing that not cutting in a weakening economy could lead to more severe repercussions.
“If we cut prematurely and inflation just runs away from us versus what if we don't cut? The economy weakens and by the time we cut the damage has been done.”
[35:48]
7. Tariffs on Services and the Movie Industry
[47:36 - 55:33]
Trump’s Tariff Proposal Michael presents an audio clip of former President Trump threatening to impose a 100% tariff on movies importing into the U.S., citing his belief that the American movie industry is collapsing.
“Therefore, I am authorizing the Department of Commerce and the USTR to immediately begin the process of instituting a 100% tariff on any and all movies coming into our country.”
[25:31]
Implications for Services Cali and Michael explore the broader implications of applying tariffs to services, a sector that makes up a significant portion of the U.S. economy. They express concerns about the unpreparedness of the market to handle such policies, especially given the intangible nature of services compared to goods.
“Sheathing services... services are a huge part of the economy and the capital markets.”
[52:05]
Hollywood’s Shift Overseas The hosts discuss the decline in U.S. film and TV production spending, noting a 28% drop from 2021 to 2024, with many productions relocating overseas to take advantage of tax incentives and lower labor costs.
“From 2021 to 2024, film and TV production spending in the US dropped 28%.”
[50:54]
8. Closing Remarks and Final Thoughts
[55:33 - End]
Resilience and Optimism Despite the heavy topics discussed, Cali and Michael end the episode on a hopeful note, emphasizing the resilience of the economy and investor community.
“The world makes it through every single time.”
[55:41]
Upcoming Episodes and Farewells Michael thanks Cali for her contributions and mentions upcoming segments like "Animal Spritz" and "Ask the Compound," encouraging listeners to engage with various content offerings from Ritholtz Wealth Management.
Notable Quotes:
-
Cali Cox:
“For every earnings season, by the way, the numbers are important, but the guidance is even more important because the stock market looks 10 steps ahead.”
[03:28] -
Michael Batnick:
“How are we getting 12 and a half percent earnings growth out of the S&P 500? That sounds remarkable.”
[05:06] -
Cali Cox:
“I do not make decision decisions just on valuations. That's like buying a shirt and not looking at the designer.”
[13:16] -
Cali Cox:
“The vibes are whack right now.”
[16:45] -
Michael Batnick:
“Rest in peace CFA.”
[25:05] -
Cali Cox:
“If we see enough job cuts, enough of a pullback on spending, then you don't have money to put into the stock market.”
[52:31]
Key Takeaways:
- Q1 Earnings: Strong earnings growth in large-cap S&P 500 companies contrast with cautious and potentially overextended future guidance, raising concerns about a possible recession.
- Mag 7 Dominance: Major tech stocks within the Mag 7 are maintaining strong profit margins and valuations closer to the broader market, but their global exposure presents risks.
- Retail Investor Resilience: Despite pessimistic sentiment indicators, retail investors continue to increase their investments and trading activities, driven by a stable job market.
- AI and Financial Analysis: The rise of AI is significantly impacting traditional financial roles, particularly those requiring data analysis and junior analyst tasks, leading to a decline in CFA exam participation.
- Federal Reserve Uncertainty: The Fed faces a dilemma balancing inflation control with economic growth, with a majority of officials anticipating stagflation scenarios.
- Tariffs on Services: Proposals to impose tariffs on services, particularly in the movie industry, could have broad and unforeseen economic impacts, disrupting the sizeable services sector.
- Economic Resilience: Despite current challenges, both hosts express optimism about the economy's ability to navigate through uncertainties, emphasizing the importance of adaptation and resilience.
Conclusion:
In this episode of "The Compound and Friends," Michael Batnick and Cali Cox delve deep into the complexities of the current economic landscape, examining earnings reports, market valuations, investor behaviors, and the transformative role of AI in finance. They provide a balanced perspective, acknowledging both the strengths and vulnerabilities of the market, while offering thoughtful insights into potential future developments.
