All About Earnings

Episode Overview

• The market's recent "risk-off" sentiment, where speculative assets like Bitcoin and meme stocks have sold off, is viewed as a healthy development that reduces the risk of a bubble.
• Despite concerns about Fed policy and accounting practices in the tech sector, corporate earnings remain remarkably resilient, suggesting underlying economic strength.
• The Federal Reserve's recent communications, dubbed the "Federal Open Mouth Committee," have been interpreted as hawkish, pushing back against market expectations for an imminent rate cut.
• Small-cap stocks remain attractively valued relative to large-caps, but their performance has been frustrating, partly because successful small companies are often acquired by larger ones.

Key Concepts

• Santa Claus Rally: The seasonal tendency for the stock market to rally at the end of the year. The speaker notes this may have already occurred over the summer and early fall.
• Risk-Off Sentiment: A period when investors move away from speculative, high-risk assets (like Bitcoin, meme stocks, gold) toward safer investments. This was observed in the market and is seen as a positive sign that reduces froth.
• Federal Open Mouth Committee: The speaker's term for various Fed officials whose public comments influence market expectations, recently signaling a more hawkish stance against immediate rate cuts.
• Earnings Resilience: Despite numerous challenges like tariffs and inflation, corporate earnings have held up surprisingly well, providing a strong fundamental support for the economy and stock market.
• Accounting & Depreciation Debate: A discussion around whether "hyperscaler" tech companies are using longer-than-appropriate depreciation schedules (5-6 years vs. 2-3 years) for their AI chips, which could be artificially inflating their current earnings.

Quotes

• At 02:39 - "I've been opposed to Fed easing really over the past 150 basis points over the past year because I thought that the economy really didn't need lower interest rates, that the interest rates are actually at neutral." - Explaining his view that recent Fed rate cuts were unnecessary and risked creating a market melt-up.
• At 03:45 - "...a few Fed officials, I call them the Federal Open Mouth Committee, decided to basically endorse what Chairman Powell said... in the press conference a few weeks ago." - Highlighting how coordinated messaging from Fed members pushed back on market expectations for a December rate cut.
• At 04:53 - "We've got this kind of a huge debate about accounting, about depreciation, and whether the hyperscalers are taking their sweet time in depreciating their NVIDIA chips..." - Pointing to a significant controversy that calls into question the quality of earnings from major AI-related tech companies.
• At 33:05 - "So if we do have a fundamental story to tell about the S&P 500, we do think it's going to 10,000 by the end of the decade... then gold in that case, because of this chart, could get to 10,000." - Projecting a parallel long-term rise for both the S&P 500 and gold, based on their historical price trends.
• At 13:10 - "Now, I'm very happy to report... the Economist front cover this week... looked like this: 'How Markets Could Topple the Economy.' So again, the Economist front cover can often be used as a contrary indicator." - Suggesting that bearish media headlines from prominent publications can be a bullish sign for the market.

Takeaways

• Monitor the resilience of corporate earnings as a primary indicator of economic health; if profits remain strong, the economy is likely to avoid a significant downturn.
• View periods of "risk-off" trading, where speculative froth is removed from the market, as a healthy consolidation rather than a purely bearish signal.
• Use prominent bearish magazine covers, like those from The Economist, as a potential contrarian indicator, as they often appear when market pessimism is peaking.