A bullish view on US equities

0:00Patrick Coffey:Welcome back to the Barclays Brief. It's Monday the 16th of March. It's Patrick here and we're recording this at 3 p.m. London time. In the studio today is Alex Altmann. He's back on the show. He's our head of Barclays Equity Tactical Strategies. Altmann, thanks for coming back in and talking on another busy day in markets. Thanks for having me on, Patrick. So if you look at the major equity indices right now, markets appear relatively composed in the wake of the escalation in Iran. It seems that many investors appear to be assuming the escalation is fairly short-lived, which explains why equities have been relatively resilient compared with past oil shocks.

0:38Patrick Coffey:But that calm is a bit deceptive. It's a bit like watching the ocean during a storm. So from a distance, the surface can still look fairly steady, with waves rising and falling in a familiar, predictable way. But the real action is underneath, in the currents. And that's where we are in markets today. Because beneath the surface, the sector moves have been brutal. We're seeing sharp rotations as investors rapidly have to reprice global risk. So on the podcast today, we're going to look beneath the surface to understand what those currents are telling us. And if you'll indulge me in stretching this analogy a bit further, how investors might think about positioning for the next market wave.

1:14Patrick Coffey:Alter, it's great to be with you in the studio today. Can you help put the last couple of weeks into context for our listeners? All right. So let's start at the highest level. As you highlight, S &P hasn't had a meaningful drawdown. We're talking probably around about 4 % to 5%. It depends on exactly where you sort of take point to point intraday. Based upon history, especially in the context of one of the largest oil price moves ever over a short period of time, that is very benign. And to your point, the real sense of urgency has been within both the sector dynamics. We've seen some significant drawdowns within parts of the momentum factor.

1:47So anything that had basically been going up for a while was liquidated quite aggressively. And similarly, we saw that internationally as well. So not just within the US. A lot of fund flows year to date had been trading into this rest of world outperformance, Europe, Korea, Japan, as probably the primary conduits. And the problem is all three of those regions are net energy importers. So whoops, if you start taking oil prices up by 60, 70, 80 % plus, then all of a sudden fast money needs to hit the door. As we both know, there's a big liquidity mismatch between rest of world equities and US equities.

2:20So I can sell as much NVIDIA as I want and I can buy very, very little of a lot of overseas companies. And in fact, obviously that liquidity mismatch works in both directions too.

2:30Patrick Coffey:Okay, so let's talk about some of those sector moves that you referenced there. You know, what are the ones that have really caught your eye in the last couple of weeks? There must be opportunities that have kind of emerged in the last few days that you're looking at. Yeah, so look, I would say from the long perspective, the most interesting one to me is still the commodity space. Something that you and I talked about the last time I came here. And that's really a function of the fact that the underlying thematic that's driving the commodity trade is this US-China decoupling. That's not changing anytime soon.

3:03We could even make the case that what's happening in the Middle East is actually only going to further fuel that narrative. The US government needs to build a strategic reserve. Chinese, of course, want to decouple themselves from any reliance from the US, especially in energy and agriculture. And so this is just going to self-perpetuate more and more as time goes on. And we've obviously seen the US make moves into actually starting to purchase some of their demands and needs, whether it's in not just rare earth, but really the entire spectrum of commodities that's on the critical mineral list, which is over 40 line items, by the way.

3:38So that had a significant drawdown over the past few weeks as fast money investors effectively incurred significant P &L losses. And that is an interesting opportunity in a multi-month, dare I say, even multi-year thematic that we think will just continue to run. The other thing which I suppose needs to get a mention is what's happening in Asia. So most notably in COSPI and the Asia memory story. The narrative here is quite obvious, which is in a world of significant AI capex, the memory demands are just going to go up and to the right. And therefore, if you look at Samsung and Hynex and these businesses, that they are the main providers of HBM memory to the world.

4:17I think the challenge here, or at least let's call it the two-way debate, which makes me a little bit more hesitant to jump into that narrative again, is two things. Number one, it was arguably the most crowded trade in the world going into what's happening in the Middle East right now. And so you don't typically unwind that within a span of a week or so. And number two is that, for example, we've got NVIDIA's GTC investor conference. They showcase new products this week as an example. But the biggest problem with the AI CapEx and inference is that we're dealing with a memory shortage. We're dealing with an inference shortage.

4:52And we're also dealing with a power shortage. It's three problems that humanity has to kind of solve right now. And I don't know about you, but I'm pretty bullish on humanity as innovators. and we as a species are pretty good at solving stuff. And so if we need to solve the problem of a memory shortage, we're going to do that. We're going to find out ways to get around it, whether it's through different chipsets and the same with power. We're going to find a ways to get around this power issue where we're going to make chips more efficient or we're going to, we will find a way. We always do. That's where I'm so bullish on innovation because for example, if we were still using the same power sources in a 2007 iPhone with today's amount of capabilities in our phone, the batteries would be the size of a desk.

5:33We solve it, we figure it out. So I guess my point being, I think the market's quite complacent on the AI memory story, but I do not think it's complacent on the commodity story.

5:41Patrick Coffey:And that kind of optimism, I agree with, of course, long term, but shorter term, humanity is looking around right now and thinking, hold on, oil prices have gone up lots. The price of gasoline at the pump has gone up a lot, and they're going to be pretty nervous. And markets have come off a bit. The stock market has derated a little bit in the US, more so in Europe and Asia in the last couple of weeks. But energy prices are a big headwind for the consumer right now. And then we've got the midterms coming up. So how do you square that circle? There's no doubt that it's definitely a hot button topic for the midterms.

6:14But I think that we need to be careful from parlaying what we see from an energy price perspective too much into direct consumer impact. There's definitely a psychological impact of, say,$4 gasoline, without doubt. But the physical impact is a lot lower based upon the numbers. So if you look at, say, the 1970s oil shock, household spending on gasoline and other energy products, so that includes things like butane or diesel or anything like that that we just use in day to day, was about 8 % of household disposable income. Today, it's 2%. And even a decade ago, it was probably more like 3%. So we're talking about relatively lower numbers.

6:54And this is where I would push back a little bit just on some of the more bearish views. Oh, we're at$95 oil,$100 oil. That means it's the end of the economy. I don't think so. 2011 to 2014, the US economy averaged about$95 oil for three years and the economy was fine. And the S &P still went up. Didn't have obviously 20 % returns, but it still went up. We still delivered positive earnings growth. I think, put it this way, the oil shock has been just as much about the rate of change than it has necessarily been about the level.

7:24Patrick Coffey:Okay, but in 2011 to 2014,$95 oil economy fine, S &P up. But it's a similar price for oil today. And yet the valuation of the market, the S &P is far higher than it was in 2011 to 2014. You've got a complete reversal in terms of market expectations around Fed cuts this year and next year, oil is feeding inflation concerns, and you've got rising anxiety around private credit. So explain to me why you think being bullish on US risk assets in light of that kind of comparison to 2011 to 2014. Yeah, so the key to this answer is really that if you look to valuation in isolation of anything else, then you're absolutely right.

8:05But the world has changed quite dramatically over the past 10, 20 longer term years, most notably is just really in corporate margins. So corporate margins between 2011 and 2014 were significantly lower than where they are today. Just to give you some numbers to back that up, today we're running at about an expected 19 % operating margin. We were several hundred basis points below that over a decade ago. The other consideration is, of course, yes, you're absolutely right. So valuation was lower. So today we're trading on 20 and a half times forward, projected 12-month forward earnings. That's down a lot, by the way.

8:41We've derated. The S &P hasn't done much this year. or down whatever, call it a couple percentage points at the time of this podcast. So let's just call it flat. But the S &P's de-rated a full point and a half from its highs, which I think peaked somewhere around about October, November time in terms of the valuation top. So margin, projected margins are still going up. Valuation has come down sharply. I mean, we're talking about one of the sharpest de-ratings of the market since Liberation Day, which I know wasn't that long ago, but that was a pretty sharp de-rating too. So if you compare it back to 11 to 2014, yes, optically you are correct.

9:13But you have to consider that margin dynamic and the earnings power of companies today is much, much different than it was a decade plus ago.

9:21Patrick Coffey:So talk to me about how you think about the US economy from here for the rest of 2026 and how you think it performs relative to Europe and maybe rest of the world. Look, I think the US economy, just as a baseline, is doing okay. I think one of the most bullish reasons I can give you on that the US economy is okay, just take the debt profile of the US economy. I mean, I don't mean the government. I just mean the private sector. Private sector debt to GDP today is the lowest it's been in 25 years, right? That is a very, very good foundation to at least absorb any kind of external shocks. So if you add on top the AI CapEx narrative, which we know is delivering a percent or more of GDP growth, especially if you believe our research who's saying that we're going to accelerate even more in terms of that CapEx spend, then you end up with a reasonably robust tailwind for GDP.

10:08And yeah, you could say it's a bit narrow and the consumer's not doing that great and savings rates a little too low and all this kind of stuff, but just it's okay, right? So from an earnings delivery perspective, then the US market should also be okay, especially because people forget that we've derated, again, we've derated through time rather than really through price. People forget that, right? It's just as a really important point that every month that the S &P does nothing, right? We're derating by between one and a half and two percentage points. That's massive. That's because we're growing those earnings by 15, 20 % a year still.

10:40And that's much more than what Europe is delivering right now, which is cheering at the prospect of having one to one and a half percent GDP growth, if they're lucky. And of course, that's probably going to get shaved in a protracted high energy environment where the US, yes, of course, we care about high energy prices, but to the earlier point, we can absorb them, especially now we're producing 14 million barrels of oil a day. We're the biggest producers globally. So again, I think that in a world where if we want to adjust to a high energy price environment or just a high commodity price environment in general, then the US stands to benefit versus other regions, especially Europe as a net energy importer.

11:17So I think that, again, back to the point about that operating margin that is a consideration for valuation. If you look at Europe as well, operating margins versus their valuation, there's nothing exciting about Europe. So I choose US corporate exceptionalism in the world of AI over any other region.

11:33Patrick Coffey:Fantastic. I think that's a very good place to end, but your short and medium term view remains. And it was the same when you were last on. You like the commodity space here and you're bullish on US risk assets. And specifically Mag7. I think you've got the cohort that operates or occupies the bulk of US equity risk right now has largely been overlooked because of this CapEx narrative. And actually, people need to consider, what if the revenue side of this AI story actually gets some momentum? What if those revenue per token gets interesting? People aren't talking about that. And that's naturally something which we're going to segue into over the course of 2026 as some of those data centers that were built over the past couple of years.

12:11And as the AI token utilization explodes higher, we might just start seeing that. And again, I think that's going to bring attention back to US equities.

12:18Patrick Coffey:Yes, absolutely. And our clients can go on Barclays Live and read a recent note that we wrote all about peak AI capex in 2028. Alty, thanks for joining. Come back again soon and look forward to catching up. Thanks, Patrick. It's great to be here. Well, it's been great to have Alex Altman on the show again today. Thanks everyone for listening. Do hit subscribe wherever you're listening and we'll see you again on the Barclays Brief next week.