Why So Bullish? Markets Cling to Iran Hopes

0:23Alex Heath:Thank you.

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1:34Today's number, 40 million. That's how many dollars the top five spirituality sellers have made on Etsy. Today's other number is 100. That's how many dollars we will be charging for our latest product, Prof G Crystals. Money market's mad. If money is evil, then that building is hell.

2:02Welcome to Prof G Markets. I'm Ed Elson. It is April 2nd. Let's check in on yesterday's market vitals. The major indices extended their rally for a second day in a row. Brent crude prices briefly slipped below$100 per barrel. Treasury yields were flat on the day and the dollar continued its slide. Okay, what's happening? Stocks are still rallying on hopes that war with Iran is winding down. President Trump said the president of Iran has asked for a ceasefire, but the US will only consider when the Strait of Hormuz is, quote, free, open and clear. That comes a day after Trump told aides he'd be open to ending the war, even if the Strait of Hormuz remains closed.

2:47The S &P 500 surged nearly 3 % and the Nasdaq was up nearly 4 % on Tuesday, and all three major indices continued their rise yesterday. So here to discuss the markets movement, we're speaking with John Mowry, Chief Investment Officer, Portfolio Manager, and Equity Strategist at NFJ Investment Group. So John, we keep on getting all of these announcements and to be clear, we are recording this before Trump makes his 9 p.m. announcement. He said he's going to deliver this address to the nation. when people listen to this, he'll have made that address. Unfortunately, we cannot analyze it. We're recording it before.

3:26However, markets appear to be quite optimistic right now. They are optimistic on Tuesday, optimistic on Wednesday as well. What do you make of the market's reaction to what might be an end to this war? Maybe not. What do you think? So I think that, you know, when you look at the multiple compression that has occurred off of what has gone on in the Middle East, you have to be somewhat optimistic. You know, technology stocks, which make up, you know, the largest sector in the S &P 500, they're now trading below 20 times earnings with accelerating earnings growth. That's actually the lowest multiple since back in 22.

4:06You've now, you know, gotten past the Liberation Day multiple. So I think you have to be optimistic as a long-term equity investor here. You know, what I would say about what's going on, you know, in the oil markets, Obviously, the oil sector was extremely strong in the first quarter. I think it was the second best quarter since 1989. And energy stocks had two distinct advantages going into the year. The first is that they were historically cheap. And then you had the exogenous shock that occurred with the oil spike. So I think that when you look at what's going on, you definitely have to be optimistic as you look at more cyclical areas.

4:46technology, financials have really been beaten up. And even though the broader markets are only down, you know, six, seven percent, the multiple has compressed far below what I think investors might expect, given, you know, kind of a more small pullback on a total return basis. Yeah, it's interesting you mentioned the tech sector there, because, yes, those multiples have been compressed. A lot of the biggest names in tech have just gotten crushed this quarter, like big, big drawdowns. And I guess what's hard to understand is how much of that even has to do with what's happening in the Middle East.

5:22I mean, on Monday, as an example, we saw there was a little bit of a rally and it coincided with some maybe peace talks or at least some announcements that made it seem like maybe the war was coming to an end. You saw this rally, but it was mostly in the tech sector, at which point I'm kind of thinking, well, how are these even related? I mean, maybe it's the helium that goes through the Strait of Hormuz, it goes into the semiconductors, but is that really the problem here? Like, what is the connection between those two? Is there any connection at all? And what does that leave you to do as an investor?

5:59Yeah, there's a lot of pieces swirling around. You know, you have the concerns around private credit. You now have, you know, So shock inflation, that's very different than hot inflation, right? So you have concern that the Fed may not be able to cut as much as folks thought. So I think that those are two obvious concerns. And then you have the exogenous shocks of how long does this conflict in the Middle East drag out? This looks like a bit more of a complicated situation relative to Venezuela. So I couldn't agree more, Ed. When you look at what's going on in technology, that was selling off well before this news came out.

6:34And that really is around concerns around can these technology companies hold their margins? Is that going to be possible to do with the advances in AI? It's really ironic that NVIDIA, the largest stock in the S &P 500, is disrupting its own siblings to some degree in the software space. No one really expected that. What's fascinating, though, and I was looking at this today, there has not been any change to earnings and margins. for the large software names yet. So either the market just wants to reprice in anticipation of earnings cuts, or it's just the market recalibrating and kind of a broadening out trade.

7:19We've talked about concentrated leadership in the market for some time. So this may be the market just reshuffling, digesting, and compressing some of those multiples as we, you know, kind of march forward because the earnings in technology stocks have not changed. It's just been a multiple compression story. So you have a lot of information, you know, with private credit, as I mentioned, that's been another concern. I think that that parlays into, you know, is the Fed going to have a harder time reacting if you have hotter inflation numbers coming out to what could be a brewing problem in credit?

7:54And a lot of that private credit has funded a lot of the areas in software. So all these are connected, whether it's credit, interest rates, and how that impacts the CPI readings coming out of the result of the oil shock. Yeah, credit, interest rates, and then, of course, AI. And I guess maybe the AI story is kind of part of the private credit story as well because the private credit concerns are based on the holdings in software, which is based on the holdings in AI or what AI could do to that economy. Yes. It seems as though, and I don't know if you agree with this, but it seems as though investors right now and the markets right now are especially unanchored or maybe a better way to put it is seem to have very low levels of conviction, at least relative to what they had in previous years.

8:48I mean, what we saw with Satrini Research as an example, where a blog post goes out that's related to AI and suddenly everyone starts selling. We saw recently with the memory chip market, which we were discussing on our show yesterday, where Google comes out with some algorithm that this is going to change the way the memory chip market works. And then everyone sells. And then Bernstein comes out with research and says, no, it's not going to be a problem. Everyone buys. I don't know what your reading is, but I get the sense that investors are just so confused right now that they're not really down to go with any position.

9:23They're kind of going wherever the wind blows. I think you hit the nail on the head. I mean, I just pulled up Micron because I wanted to get it exactly right. Micron is growing forward earnings at 739 % and trades at five times earnings. So that is the market telling you it doesn't know what to do with the earnings profile. The earnings growth is so egregious to the upside, the market does not know what to do. So the multiple is being pushed down, even though the stock has gone up, because the earnings have accelerated so dramatically. The same thing is occurring with NVIDIA. NVIDIA is growing at 80, and it's trading below 20 times earnings.

10:05That's, you know, at a parity almost with the S &P 500. So I couldn't agree more. I don't think folks know quite what to do with this. I think that it's really going to come down to CapEx spend from the hyperscalers. We'll get a read on that as we roll into quarterly earnings. But I will say this is one risk that, you know, is out there. To the extent that, you know, Microsoft had a really tough quarter, to the extent that, you know, the MAG-7 continues to struggle in the equity markets, that is going to put pressure on management's ability to continue funding CapEx. You know, historically they've done it from free cash flow.

10:41Now they're having to tap the debt markets. So the market will only tolerate that so far. So I think that, you know, what what plays out here with the war in Iran and the CPI continuing to come in is going to be really critical, because if the equities prices stay stay weak for the MAG7, you know, those are the those are the customers for many of the of the chip and memory stocks. So it's going to be tougher for them to continue the CapEx cycle. So we're going to have to see how those earnings shake out. But I will tell you, as I sit here today and I look at where valuations are, I look at where earnings are, and I look at the sectors that did well, some of the more defensive sectors, energy, utilities, REITs, I'm optimistic that we could push through this.

11:33And I think that the current administration really does not want to war on their hands. The midterms are coming up. I think that there's going to be a lot of pressure to resolve this relatively quickly and move out. And particularly with, you know, the administration saying they want lower rates, it's going to make it way harder if you continue to push oil prices because the straight stays closed. And, you know, that's 20 percent of the of the words world's oil supplies going through there. So what one point that I will make, though, is fascinating. I haven't heard anyone talk about this. It relates to oil.

12:09So in 2022, you had two real bad things going on, right? You had interest rate hiking cycle. And then you had the Ukraine. Ukraine was invaded by Russia and you saw oil prices shoot up. And that was a really tough period for the market because you had the Fed raising rates to deal with inflation from COVID and supply chain disruptions. And on top of that, you know, you had a war going on. So it was really tough. And what occurred was you saw the Baker Hughes rig count really ramp up oil production to compensate for the higher oil prices. That has not happened yet. The Baker Hughes rig count has not moved higher.

12:49We're going to get a reading tomorrow on that. But that's also interesting. You know, that would need to move up, I think, to kind of release some constraint. If that doesn't, you actually could have a scenario where the Gulf refiners and the energy stocks maybe continue to participate in the market. But you see technology, financials, and other cyclicals kind of play a catch-up trade as well. So it could be a bullish setup. Right. Yeah, it seems as though you would buy the dip or maybe you have already bought the dip. Are there any names or any sectors that you feel particularly bullish on right now?

13:25I get the sense that that is your position. Yeah, so I will tell you that we have taken some energy profits. We were overweight energy, and that was not a call based on anything in the Middle East. It was a bottom-up call on valuation. So we were fortunately positioned, you know, the right way this quarter. Yeah, so, you know, we'll take it. But what I would say is that we've been adding to some of the more cyclical areas like financials, like industrials. You know, financials have went through a really tough time, particularly the regional banks back in 2023 with the failure of Silicon Valley and First Republic.

14:01You know, you're getting a lot of multiple dislocation. Price to books are attractive there. And the yield curve has steepened. Now, we'll see what happens here with the Fed. If they don't cut, that's going to put a little bit of pressure on the yield curve. But my expectation that you should have a steep yield curve, that's a healthy sign for the economy. I don't think you want the 10-year parity with the Fed funds rate, which is basically where we are today. So if that steepens, banks should fly. They've got great balance sheets. They're not exposed to private credit. I like financials here.

14:33And then, you know, as I mentioned, you know, some of the industrials in the capital goods space, industrial machinery, these names look attractive. And, you know, I think the market is trying to recalibrate, doesn't want to pay for longer duration assets, meaning the software trade, or is more interested in cash flow generative hard assets. And I think the market is recognizing that actually the AI trade needs hard assets. and so maybe it's overly discounted these areas relative to uh you know the technology trade so i think that you could see a compression there you're already seeing it so yeah i i'm i'm i'm optimistic you know we could see a leg lower i would not be surprised if that happens but that being said i think that you should be adding to equities here uh given that you're you know you're you're getting the s &p you know it was under 20 times yesterday right just before we let you go here, we'll see what Trump says.

15:29But you mentioned that this administration probably doesn't want to have a war on its hands, probably doesn't want to be dealing with even higher oil prices. Midterms are coming up. I agree conceptually with all of that. However, it's also, that's also what I thought at the beginning of the year. And it's also what I thought last year. And then they did start a war. And they did close down the Strait of Hormuz. And they went ahead with all of this. So that leaves me in a slightly difficult position. I agree, theoretically, probably they want to end this thing. But then I look at what they do, and I'm like, well, maybe not.

16:08Maybe there's no way to understand it. Maybe there's no way to get into his mind and predict what's going to happen. I guess my question to you is, let's say this continues. Let's say the speech is a nothing burger, or he says, actually, I'm doubling down. Would that change your position at all? And if so, how? You know, I think the playbook is what happened with the tariffs. He drew a hard line and the market ultimately forced his hand. It's not unlike when Mark Zuckerberg said, you know, we're going to rename the company Meta. We're going to do the metaverse. And then the market took the stock down 67 percent.

16:47And he said, whoops, it's the year of efficiency. So the market ultimately dictates how leadership has to respond. So they can draw hard lines. But Trump is, he does seem to be very aware of what's going on in the equity markets. And to be honest, I don't know if that's not improper. I think that a leader of the country should be focused on what the largest companies in the world are doing. So I actually think that if he comes out with a more negative stance and the market reacts very negatively, my expectation is that that will be pressuring him. Because again, to the extent the markets stay negative, that starts to put pressure on the CapEx cycle.

17:27That puts pressure on the AI buildout. That puts pressure on tensions with China and their buildout. So there's all this geopolitical chess that occurs with a weak equity market. I think for America to be in the best position, we need a strong equity market. And I think that that's going to ultimately be the lever that he uses to or that he's going to be considering when he thinks about how he deals with the Iranian conflict. And I think that my personal opinion is it's already proved to be more complex than he anticipated. Yeah, I think that's right. John Mowry, Chief Investment Officer, Portfolio Manager, and Equity Strategist at NFJ Investment Group.

18:08John, appreciate your time. Thank you. After the break, OpenAI makes history again. And if you're enjoying the show, please follow our new ProfG Markets YouTube channel. Starting next week, that is where you'll find our content on YouTube. The link is in the description. Subscribe now.

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21:39We're back with Prof G Markets. OpenAI just closed the largest funding round in startup history. The round brought in$122 billion of committed capital, up from the$110 billion the company announced in February. SoftBank co-led, alongside Andreessen Horowitz and D.E. Shore Ventures, Amazon, NVIDIA, and Microsoft also participated. The company is now valued at$852 billion, dollars but it's generating two billion dollars in revenue per month it is still not profitable and it is still burning cash so here to help us break down the largest funding round in history we're speaking with alex heath author of the sources newsletter and co-host of the access podcast so alex 852 billion dollar valuation uh that makes it the most valuable private company ever neck and neck with SpaceX, which as we know is going public soon.

22:40I guess let's just start with your headline reactions.

22:43Alex Heath:I mean, these are astounding numbers, right? We may have three trillion plus AI IPOs this year. So OpenAI, SpaceX, obviously, and Anthropic. It's a race between OpenAI and Anthropic now to get out next, I think. They're sounding numbers. I mean, the growth rates are the story, right? The growth rates of, you know, in OpenAI's case, the API business, Codex, which will be, I think, more central to the company's story this year than even ChatGPT. And then the continued, you know, ChatGPT growth has definitely slowed, but still winning consumer and very early on the ads piece there, but starting to move into that quickly.

23:34Alex Heath:So astounding number. I think proving that Sam Altman has won his already kind of de facto title as the greatest fundraiser in Silicon Valley history, this definitely cemented that. Someone should do the math. He's raised, gosh, what, over$200 billion for the company at this point. in the last like three years. So the last time we were all talking about this kind of fundraising talent was Travis Kalanick and Uber way back in the day. And that was, you know, I think 60 or 70 billion. So not even the total sum of this one round. Yeah, it is. It is astounding. One thing that's a little interesting to me, $852 billion valuation.

24:17I mean, that tells you a story of just demand going absolutely through the roof, the fact that he's able to raise this amount of money and at this valuation, it would make it the 13th most valuable company of all companies in the world, which is just astounding. But then there was also this report from Bloomberg. They were saying that OpenAI shares on the secondary markets, the demand for those shares has been plummeting. They were saying that there are people who have been trying to sell their shares,$600 million worth of shares that an investor was trying to sell, and he couldn't find any buyers.

24:58And so that was quite interesting to me. It feels as though maybe there are two different worlds here. There's, I guess, the private markets going and getting these shares directly from the company. And then I guess secondary markets where maybe there's a different story. I'd just be curious to get your reaction to that story.