Talk Your Book: What's Working in the Stock Market?

14:16Chris Galipeau:Now investors are like, okay, there's some other names out there. And oh, by the way, look, the multiple on the equal weight S and P is about 17, 17 times forward. Sign me up. Great. Yeah, exactly. Me too.

14:27Ben Carlson:Michael and I have been talking about that, the speed of the markets for a while now, and you're right. It's everything's happening way faster. The downturns, the repricings, the upturns. How do you think about something like the software sector that is being repriced feels like immediately? It's happening in the blink of an eye. People are trying to figure out what the AI impact is going to be. And obviously there's maybe some babies being thrown out with the bathwater. But how do you even try to consider something like this when everything is happening so fast? Do you say like, all right, I'm not even going to play these games?

14:55Ben Carlson:Or do you say, no, no, no, now is the time to really get my hands dirty and get in there?

14:59Chris Galipeau:I think it's a little bit of both, right? You got to separate the wheat from the chaff, right and so this is where so i was a software analyst analyst for a long time and what do we know about that space right strong reoccurring revenues we could right and because the businesses were like recession uh not agnostic but were resistant semi-impervious to recessions resistant yeah we could model out those cash flows assign some terminal value and probably award a higher multiple because we were super confident in microsoft's you know sales of office 365 so on and so forth. Now AI rolls along and a lot of that is being, you know, called into question.

15:33Chris Galipeau:Look, valuation is not going to help you, right? The reality is you don't know what the terminal value is of those cash flows. And if you reverse it, how can you figure out the implied growth rates? That's what's happening here in software. You know, are there good names being thrown out with this? Definitely. But is it, is it a concern? Yeah, sure. Look, people, people forget if you go back to 2000, Nortel and Lucent and JDS Unifaz, they're not around anymore, right?

16:01Ben Carlson:Yeah, I think the overreaction makes sense to me. I keep saying that. I think it's okay people are hitting the sell button first and asking questions later and letting other people sort it out. I totally understand that.

16:12Michael Batnick:It's an overreaction. Nobody's like, this makes no sense. No, it makes total sense. Now, we'll find out. We'll find out in I don't know how long it's going to take, if it's going to take six months or two years or three years, whether or not this is an overreaction. But I think everybody says, yeah, because nobody knows how bad this gets.

16:31Chris Galipeau:And I think that's really it, Michael, right? You just don't know. Or you can say, if you don't own the names, right? If you're not long the names, you'd say, okay, this is just too hard for me to figure out here. We can do all the analysis we want, make all the assumptions and build a pro forma income statement, but you really don't know. And so if you don't know the answers to that, how can you put some multiple on it and a future price target, right? You're kind of in no man's land.

16:53Michael Batnick:That is like the scary part. It's like, yeah, these might be great businesses today. They might be great business in two years, but what about four years? And obviously the moat, the pricing pressure, the recurring nature of the revenue, the margins, all of that is in question now. And it's bleeding everywhere. So you see like in our industry, Altruist, a company that we work with, but a very relatively small custodian announces an AI tool that is not, we knew it was coming. And Schwab falls 10%, LPL, Raymond James. I mean, the market is, it is weird because I'm saying like how the market is very feel for right now.

17:31Michael Batnick:Meanwhile, the S &P is within 2 % of an all-time high, but it does feel, maybe this is how I feel. I feel like the virus of fear is spreading rapidly right now. Agree.

17:44Chris Galipeau:And I'm scared. You can feel it today, right? You can feel it today. And every bounce for the last couple of weeks, definitely today, is getting sold right into. And all the names we just talked about there, the IGV, good luck with that, right? No bid. And it is spreading, right? In your own business, as you just talked about. It hit all the banks. It hit the legal firms. Look at the Accentures of the world, so on and so forth. And probably going to continue to spread, right?

18:09Michael Batnick:Let's talk about an area of the market that is not impervious, but it's different. International stocks. Obviously, Franklin Templeton has its roots in global stocks. And not only no problems there, but it's just such a fascinating turn of events for international stocks that really and truly in December 2024, it was like, are we really going to another year saying the same thing we've been saying for the last seven years? And now they're working. It's like the only thing working in terms of equities.

18:48Chris Galipeau:Yeah. So I can tell you from my seat, when we rolled into 25, we're bullish ROW equities, right? Rest of the world equities. I mean, I got hate mail for that call. Hate mail for it. and despite the fact that we could show the earnings power and you know equal to or better than the u.s for the first time in 15 years nobody wanted to touch it same can be said by the way for small cap right in the u.s but once bitten twice shy investors didn't want to have anything to do with it and people assume and wrongfully assume this that you need some you know big currency devaluation to drive those names now you had that tailwind in 25 it accounted for almost all the alpha versus the S &P, but the foundational pieces that make any stock work or any index work or any country work, the foundational piece, i.e.

19:37Chris Galipeau:earnings power, forward earnings growth, is present in EM. It's present in India. It's present in Japan, right? It's present to a lesser extent in Europe. And so we started that call last year and maintained that call coming into this year. But you're right, right? And I don't think you need currency debasement necessarily. Is it a nice tailwind yeah but the earnings power was there and the valuation's there and like for the prior 15 years right from 09 guys to 2025 s &p earn s &p is up like 600 because spoo's earnings are up 250 and in that same window right em earnings are up like 30 and european earnings yeah or european european earnings are up a little more than that you want to know why those markets were cheap.

20:20Chris Galipeau:That's why. There was no earnings power, right? So things can stay cheap forever until there's a catalyst to unlock it. Now, in the last two years, you've got the catalyst to unlock it. But, you know, Ben, it's probably not different than, I think it's similar to the rotation in the U.S., right? Where you've got very few people with any significant or substantial ROW equity exposure in portfolios. Now there's a scramble on. They fought it all last year. Oh, it's all currency. It's all currency. And we were saying, it is, that's helping. But you've got earnings power here, folks, and you've got to recognize that.

20:52Chris Galipeau:But yeah, it's worked well.

20:54Ben Carlson:So you're a believer in the shareholder reforms too? Just the fact that the stock market is almost ingrained in us now. And that's not so much the same thing overseas in many places. Do you think that tide is turning too, where they're going to finally make it so, return money to shareholders or treat shareholders better? Is that going to stick this time?

21:13Chris Galipeau:I think it has been sticking. That's been underway in Japan for five plus years. right and now i guess i you know personally have a bigger question mark on european eps growth and that sort of thing but yeah it has but to me the setup was interesting because you've got the you've got the valuation discount like i really don't care about that until there's a catalyst to cause it to re-rate and then when we saw that start to crop up going into 25 i'm like okay maybe this is it but boy investors don't want to believe that and it probably has not probably it has legs So maybe this is my recency bias talking, but I was saying to Ben last week, it does feel like people are extrapolating the current environment out into a long time.

21:57Michael Batnick:And maybe they're right. Like maybe these software names just don't catch a bit because I don't care what you tell me next quarter. I don't care about the next quarter or the next quarter because it doesn't matter. There's nothing you could say that's going to make us forget that AI is coming. It's here and it's going to change your business model. And this is an open question. How much time? What if, is it six quarters of new all-time highs for the earnings? If Adobe is six quarters from now saying like, hey, it's our eighth quarter in a row of all-time highs. When are you guys going to respect the fact that we're using it too and we actually have a sustainable business model?

22:38Michael Batnick:But nobody knows how long it's going to take.

22:40Chris Galipeau:I agree with you. I agree. And I think that's the challenge. And so people get in to shoot first, ask questions later sort of thing. Right. And that's clearly where we are here in the last couple of weeks, big time today. But I think to the extent, right, that we could get some of that, let's say we get some of that, Michael, right? You get, you know, I'm just going to, I probably shouldn't throw out names, but you guys know the names and they start reporting earnings. They start to talk about AI in their own business and how it's accretive and all that sort of thing. Maybe we'll start to see some sort of sea change, but that would be, I think Dan Ives, who I've worked with for forever, as a PM, Danny was on the sell side, obviously.

23:16Chris Galipeau:I think he talked about that this week, right? And he's right. That could be a little bit of an elixir.

23:21Michael Batnick:So we've got Salesforce and Snowflake this week. And of course, NVIDIA, which is, I mean, it's not besides the point. We know they're going to report ridiculous numbers. There's no question that there's a shortage of compute. But man, it's hard to feel good about the market when software, gigantic software names are falling 4 % every day.

23:44Chris Galipeau:No, it's, right. It's, look it, you guys know this. It's an emotional game, right? And it always is. And when it gets to, when we get in periods like this, it's stressful. But I would also fall back on what we hit on earlier, that the S &P is like down 50 basis points on the year and there are an awful lot of stocks that are up.

24:05Michael Batnick:It's just not the names we're used to. So I don't know if that's comforting or not. I could credibly make an argument either way. But I think the thing that feels different, at least for me, for this recent sell-off, which again, yeah, the S &P, it's nothing. We're down 2%, whatever. A, we could be down 11 % by next week and who knows a month, two later. Fair. But more than that, every time there's a sell-off, it usually isn't accompanied by fears of, hey, wait a minute. Am I taking too much equity risk because I should be hoarding cash because I might not have a job in 18 months. And it's hard to reintroduce risk appetite when that black cloud is hanging over every investor.

24:47That's a good point.

24:48Chris Galipeau:That's probably the one thing that I started to think about this on. While you were buying Blackstone on Friday, I was looking at that basket and I'm thinking, okay, what is the message here? And moreover, what is the message with the action in the big banks? right? What, what would happen if AI becomes so prominent, so powerful that we do start to see people losing jobs, a lot of jobs, right? Then you got the unemployment rate up. Then you've got the negative vortex of consumers pulling in their horns and that sort of thing. You can talk yourself, work yourself right into a recession or a scenario if that happens.

25:23Michael Batnick:Oh, I'm doing it. I'm doing it, Chris. So, so I've been saying for the past couple of months, I'm like, look at, don't tell me about the consumer. Look at Capital One. Look at Ally. Don't tell me about stress in the car market. Look at these stocks. I just don't believe you. Well, guess what? Capital One is down 8 % today.

25:39Chris Galipeau:Rototilled.

25:40Michael Batnick:Again, on no news, and it's breaking hard. It hasn't been this low since June of 2025. And it's hard to, I'm not hand-waving this away.

25:50Chris Galipeau:Listen, there is information in stock price movement, period, end of story. And if people don't believe that, at some point in their career, they will come to realize that that's probably the most important source of information, right? We can talk about all the, you know, what the companies say on earnings calls and all that sort of thing, but there's always different and probably better information out there. And you're right. I mean, it is a little bit scary to watch these things come unglued. I mean, American Express, not a small company.

26:15Michael Batnick:Is there any, like what's more blue chip and American Express in particular, That's like exposed to the luxury segment of the market. That's white collar unemployment. That's right. That's a perfect example of the fears over the weekend, all the doom scrolling, the bear porn articles people are reading, myself included. Not fun, not having a good time.

26:35Ben Carlson:How do you try to handicap that? Because I can see so many different macro paths here if AI takes hold versus like, you know, could it lead to deflation? And could that also lead to lower rates? And could that also lead to a big fiscal response to the government. I feel like if you try to go down the different forks, it's enough to make your head hurt. And I don't see how you try to handicap those situations of AI taking over the world versus, no, maybe AI just takes us on a similar trend that we've always been on. And it's not going to really be a huge disruption. It's just going to make people's lives easier and better.

27:07Ben Carlson:And I don't know how you handicap the situation.

27:09Chris Galipeau:Let's look at what Walmart said on their call Friday, right? So Walmart comes out, reports good earnings. They've already told us, they've already told us that they expect to grow revenues for the next five years at the same rate they grew them for the past five years with zero headcount, right? Adding zero headcount. And so using AI, whether it's in procurement or a supply chain, whether it's on the floor, they believe will be, you know, incrementally accretive to revenue margins and ultimately net income and earnings, right? In their call, they said, we noticed that shoppers that were using their AI tool while they're in the store spent 35 % more than the shoppers that were in the store that didn't use it.

27:56Chris Galipeau:So if you and Michael are in the store, Michael's on it and you're not, he's going around buying all kinds of things because it's telling him he might like product ABC. That's accretive, right? That's good news. And that's the good part of AI. And by the way, what have we heard from big name companies in the last two to three quarters? JP Morgan, Home Depot, Citibank, a bunch of the logistic companies have talked about it. The benefits of AI, right? Now, whether it starts taking everybody's jobs, I mean, I'm not really in that camp. I think it'll probably take some, but I think the Walmart example Friday, that's probably how I'm thinking about it mostly, Ben, to be honest.

28:36Michael Batnick:Chris, if you could fast forward to the end of the year, other than like stock prices, is there anything that you would want to see in order to tell us today what happened for the rest of the year? Would it be unemployment rate? Would it be Fed funds rate? What would you look to?

28:52Chris Galipeau:You know what I'm hoping for here, to be honest? And this is, you know, it's always tough to go through these things. We're in a midterm year, right? We know that midterm years are rough years, average returns well below long-term returns. What most people don't know is that 12-month forward returns. 100%. Right. And I think you guys even put something out about this in the last couple of weeks. We've done the same analysis. We'll publish it soon. It is an absolute home run to be using weakness in a midterm year to take risk, right? Now, I'm not saying you got to go out and buy software stocks necessarily, but S &P behaves well.

29:27Chris Galipeau:So what I hope for, and I'm hoping for, and we're getting it, right? I think we get this moderate vol chop. stop maybe we get give me vix over 30 give me the rsi on the smp under 30 and it's go time you want to take it to 40 you want to take it to 50 it's margin time let's do it that's right let's do it

29:43Michael Batnick:you know but chris the vix is at 21 i know it's not it's like on the floor like that worries me too i know it's like this is like a very very orderly panic it's not a panic it's just it's

29:56Chris Galipeau:just a bleed it's weird but the paper cuts are now becoming like hatchet cuts and things like AXP and some of the other names that we've talked about, right? Certainly in software. And look, you guys know, it doesn't take much for VIX to go from 21 to 32. And it could be two days, could be three days, right? Could be this week. But I think we get that. Then the risk reward starts to improve, right? Because people forget this, that as stock prices come down, you know what else is coming down? The risk in owning. Risk, right.

30:23Michael Batnick:So that's the thing that I always take comfort in. You want to give me all this bad news, all the what could happen? Hey, guess what, asshole. Excuse my language. Yeah. The market is pricing in bad news. What do you think? What do you think Microsoft being down 30 % means? That's risk. We know. Markets bottom on bad news, guys. Got to remember that.

30:41Ben Carlson:To leave people with like a positive sentiment, because I feel like so much of the AI stuff is just, it's very, it's easy to get into the negative doom loop. I agree. And I'm a very optimistic person.

30:52Chris Galipeau:Michael needs a support group, Ben.

30:54Ben Carlson:I really do. I was feeling very upset last night. My thought process is though, like margins continue to climb higher slowly but surely through everything that's happened this decade, right? Everything corporations have gotten thrown at it. Supply chain problems, high inflation, tariffs, all this stuff. Margins just keep moving higher. What could cause margins to fall when AI is potentially one of the most productive efficiency generating machines that we've ever created? At the end of the day, isn't this good for profits?

31:23Chris Galipeau:Agree. Agree. Isn't that what Walmart told us on Friday? It is. I guess the market is just sorting through whose profits. I think that's right. Right. I think that's right, Michael. But I think that's right. Look, in my entire career, you know what I've been told? Operating margins are a peak here. Margins can't get any better. They've gone up for 35 years.

31:41Michael Batnick:Right. Exactly. Maybe I'm just telling this to myself to feel better. Today, the macro backdrop is pretty okay.

31:47Chris Galipeau:Yeah, I agree. I agree.

31:49Michael Batnick:Unless like, not the worst comes to pass, but I think unless unemployment really is on its way to 6%. Hard to get too bearish. Right. Michael, don't get too bearish. Don't get too bearish, Michael. Come on, don't do it. Hang in there, Michael.

32:01Ben Carlson:The thing is, the unemployment rate is still at 4.3%. The prime age labor force participation rate is essentially at the highs of all time going back to like matching like the late 1990s run, right? Maybe you could say, well, this is the peak. It's going to get worse from here. And that's possible, but we haven't seen a huge impact yet. And I really do think that corporations are going to think very hard about the political ramifications of mass layoffs because of this technology. I just don't, I think you can't take out the human element of these decisions. And I think that's something that we have to consider as well.

32:31Chris Galipeau:Right now, we're in the eye of the storm, right? And we need to remember, investors need to remember that the storm always passes. The landscape may look a little different on the other side, but the storm always passes, right? And this one will pass too. The landscape might look different, but it's not the end of the world, right? And let's remember, the S &P is barely off its all-time high. The biggest risk to equity markets and to earnings and profitability are recessions, right? Median earnings degradation for the S &P during recessions like 15, 18%, right? Median max drawdown is 28, 30. Those are almost always caused by one or two things.

33:11Chris Galipeau:The Fed breaking it, right? Overtightening, staying tight too long, causing a liquidity crisis and or a credit crisis. That's what we're used to. Or we get a black swan like COVID. We're certainly not in the first part of that, over-tightening, breaking something, right? I don't know about

33:27Michael Batnick:black swans, but - Top-line revenue growth has been the highest since 2022. Yeah. Like, amidst all the fear, companies are killing it.

33:36Chris Galipeau:Right. Earnings growth in Q4 is like plus 13 % year on year. Probably going to be similar this year. Interesting environment. Right. Never a dull moment in this business, right? But to Ben's point, if you can improve what might be good for Wall Street in this case, i.e. lower higher EBIT margins potentially because they can be just as productive without adding headcount and or reducing fixed costs is accretive to margins and accretive to earnings, right? It might be, you know, we don't want to see the unemployment rates spiral out of control. That's for darn sure. But that hasn't happened yet.

34:13Michael Batnick:Chris, for people that want to learn more about your thoughts and follow your writings? How do they get a, how do they get that?

34:20Chris Galipeau:Yeah. So, um, you can track me down on LinkedIn and there's a newsletter that I write, uh, every weekend gets published Sunday afternoon or Monday morning. So you can find me on LinkedIn, Chris Gallupo, and just subscribe to the newsletter. You'll get the comments in your email, um, every Monday morning, very straightforward. You know, I'm a no BS guy. I'm not pulling any punches there. I'm going to let you know exactly what we think.

34:43Michael Batnick:All right, Chris. This was, I don't know if fun is the right word, but this was a good talk, a sobering talk. You're going to be okay, Michael. We're going to be okay. All right, man. Appreciate your time. Thanks, guys.

34:57Ben Carlson:Okay. Thanks to Chris. Remember, check out Chris's newsletter on LinkedIn. Check out frankatempton.com to learn more and email us, animalspiritsatthecompoundnews.com.

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