Are the Tech Giants Teetering? With Jeremy Schwartz

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0:39Are the tech giants teetering? Hi, everyone. Happy Friday. Welcome to the Real Vision Daily Briefing. With me today is Jeremy Swartz, Global Chief Investment Officer at WisdomTree. Hi, Jeremy. How are you? Thanks for having me, Maggie. Good to be with you. Yeah, great to have you back. So pretty quiet trading day today. Stocks and bonds traded in a really tight range, pretty much unchanged everywhere, which is probably a relief because it was a little bit of a messy, ugly week, definitely a down week for stocks. What do you think is weighing on sentiment when it comes to U.S. equities? Well, there's a combination.

1:13There's valuations is one question. This week, there's the China headlines. For the largest stock with Apple, this question of, is China going to ban more of their phones from being used in the government? Now, we have a colleague at Wisdom Tree who just spent the summer in China. She's got 20 family members in China. some work in the government, some work outside the government. She thinks it was a big, a bit of an overreaction to the news that a lot of the people were already not buying the phones if you worked for the government. So perhaps this is a small marginal change. Now, the question with China generally is not going away.

1:56I mean, the tension we see is a decades long tension. I mean, the only thing that's uniting U.S. politicians is to be anti-China. And so I don't see that going away. So I expect those kind of headlines to be tit for tat. I don't see that going away easily. But the specific Apple news this week, which did cause a pretty big ripple on Apple, we do think was a bit overstated. Yeah, I want to ask a little bit more about China in a minute. But But it seems like these stocks were kind of ready for some kind of headline to hit them, right? Whether you're looking at Apple, whether you're looking at NVIDIA, there's just been so much concern about, especially when it comes to NVIDIA.

2:39You mentioned valuation, so much concern about the level. And yet so many people are afraid to get out of it or book profits or short it because every time they think about doing that, the thing goes up again. um are we going to continue to see is this just a kind of like consolidation a normal type of pullback consolidation after the kind of gains we've seen or are we going to see that leadership start to crater you're hearing more of the word bubble around nvidia um it's been in the headlines this week but from a few of uh our uh colleagues outside of wisdom tree even i mean i did this piece a few weeks ago, we had noticed NVIDIA became the most expensive stock in the S &P 500.

3:22In March, it had sort of took the largest price to sales mantle. And so we started getting interested in saying at these levels of valuation, what does it take to succeed? What are the odds it continues to be a winner? And there's been about 100 different companies among the 500 largest that got to that top vaulted stock, you know, status. And, you know, what you find is in the next 12 months, they actually do okay. You know, on average, they've actually been able to keep up, slightly beat the market over 12 months. But when you go to the long term from that, it's been a real, real struggle. And so then we looked at not only just the highest multiple stocks, the S &P 500, we said, all right, at 25 times sales, which is their expected sales, not their trailing sales.

4:09Trailing sales was 40 times, but at 25 times even expected, what's the odds of success? There you got about 230 companies that got to that level. And about 20 % can outperform over the next 12 months, about four to one odds against you from outperforming. But you go three, five, 10 years out, and we're talking 90 % fail. So it's not good. I mean, and some of the average or median performance versus the market over the next three years is like down 20 % a year. So we're talking big, substantial underperformance. So my sense is it's a very high hurdle for NVIDIA. Now, I think the latest earnings report goes to exactly this question, right?

4:52They had another blowout earnings, and the after-hours trading spiked to 500. But it's not anywhere near 500 now. we're talking 10 % down from that immediate response, even after a blowout earnings number. And, you know, so it shows you that even dramatically beating these high expectations, not enough. And so I think I did a follow-up piece to that, sort of looking back through history, saying who were the winners, who were some of these other high multiple companies, and I compared it to Cisco. You're seeing that comparison to Cisco come up a lot. We're not a piece saying, NVIDIA, does it remind you of Cisco or Amazon?

5:34Amazon also was one of the higher multiple stocks going back 20 years ago. It was able to deliver 30 % sales growth a year for two decades. I mean, that's an unbelievable track record, but it was 12 times sales back in 2000. And you're more than what, you're triple that in the sort of trailing sales number. but it doesn't feel to me that it's like Amazon it feels to me more like Cisco Cisco was the infrastructure for the internet the internet exploded wildly probably but beyond anybody's imaginations 20 years ago and so it delivered that hype and Cisco yes was a key infrastructure and the leader back in 2000 but there was so much competition because of all the growth and so I think that is what where you're at with NVIDIA today AI is going to be undoubtedly critically important.

6:20We're going to see AI explode everywhere, but NVIDIA probably won't be the only chip company going after it. And so there'll be competition and that'll eat into its sales growth, which will make it tough. Yeah. I think that's so interesting to look at it that way, because the narrative that everyone gets caught in is this explosion of AI, which many people, you don't hear them batting that down. There are a lot of people who say, yes, absolutely. This is a revolution. It's going to be massive. We're just wrapping our head around it. So that can be real. But when you look at it through the lens that you just mentioned going back in history, we know that that's happened before.

6:59And certainly the internet is a great example. So it kind of enables you to look at it removing that narrative or comparing against other things that were also transformational to see if you can survive that. Someone also pointed out with Amazon, you know, it started out as a bookseller, right? It's not even remote. I mean, yes, there are still books on Amazon, but it basically turned itself into a completely, a multitude of other companies. So it's not like it was the original business model that persevered and was able to return all of that. You know, it's a completely different beast now. So that almost sounds like it doesn't, you know, doesn't even fit or count if you're measuring against that.

7:43So it could NVIDIA do that? Yeah, that's sure. But it would have to, it sounds like, in order to get in that very rarefied group of companies that are able to do that. To deliver the growth expectations needed to justify that and see where the valuation settles out in the long run. It's always tricky from just the higher the multiple, the higher you've got to deliver. And in the short run, I mean, you can understand it's, hey, it's the prime AI stock. There's very few who are captivating the moment like it does. But I do think there will be more competition for it over time. And it doesn't feel like it has as many tangential businesses like Amazon had where it expanded.

8:29But now, of course, you don't see it today. I mean, all these things can come up and it might find its way into a whole lot of new markets. And, you know, it obviously has this software element that's what's driving the chips that is Perhaps that leads into all sorts of other new things that we can't anticipate today. There's obviously a lot of potential for that. You never know where these Swiss interns go. But I've got nine to one odds against it in terms of it being an outperformer over 10 years. It's going to be important because it's in so many people's portfolios right now, you know, or investments or 401s.

8:59I mean, this stock is everywhere. So many people are holding it. We get a lot of questions. Do I continue to hold on to it? Should I sell? People are so torn about it. It's a tough one. And you need to see into the future. None of us can do that. So you're banking on the fact that this thing is going to move lower, though. Does it take the whole market with it? Well, I'd say - Or is it going to move lower or just not go higher? My study was on, does it underperform the S &P? So when I said fail, I think you can get better returns 9 to 1 against you, better returns by just buying an index. Now, you can say, hey, I want AI.

9:38I still believe in the power of AI. Do I have to buy NVIDIA? You know, there's other ways to do that. I mean, we even have an ETF WTAI that's sort of more diversified. It only has a few percent in NVIDIA versus a number of them could have 10 % or more. You obviously wouldn't have 100 % if you're just buying NVIDIA. So there's other ways to play the theme without relying on that single stock. Now, you know, that's not certainly the cheapest segment of the market. Some people are looking at the NASDAQ and the Qs as another way to do it. You know, when I look at valuations for that segment, we see the S &P slightly below 20 times earnings.

10:14I see tech, which is about 40 % of the S &P 500, is probably the 27 to 28 times earnings, when the ex-tech is about 17 times, so about 10 points lower, which is, you know, And dividend stocks may be in the 15 times. There's definitely ways, cheaper ways to own the market. Tech, I think, is expensive generally. But you understand it's captivated at the moment. There's no question. It's symbolic of all the growth that people are looking for. Does it feel like we can get rotation into other areas? Or if we lose that tech leadership, is that a sentiment barometer? And we're looking at an overall weaker equity market.

10:59Well, you're seeing some of it. I mean, energy was so weak to start the year. It's picked up. And, you know, I'm not fully just looking at the charts, but you can see it's breaking towards interesting levels. I happen to think energy plays a unique role in portfolios. It's a hedge against a lot of these other inflationary dynamics that could be a cause for rates to stay higher for longer. And, you know, last year was like the perfect hedge as one of the few sectors with very strong returns when bonds and stocks sold off. I think you start to see that in the last few weeks where energy was going higher, markets were going lower.

11:37So there are sectors that could do well, like energy, that might be a pocket of strength, even in a down market. In particular, because you can see energy creating some of the inflationary dynamics that causes the Fed to be tighter that then gives the market more angst. So that's one in particular. But if tech is meaningfully lower, it's 40 percent of the S &P. So that's it's tricky for the whole market to overcome 40 percent. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision daily briefing.

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13:21Yeah, no, exactly. Exactly, because there's so much concentration. This is what many had been worried about when you have such narrow leadership. By the way, I just happened to be looking. We were talking about it being a very kind of thin, very range-bound day. We did get the major U.S. indices managed to creep up into the green right at the close. But it's still very marginal and it doesn't really change the week that much. So interestingly, when we were talking about Apple and the issue of chips as well, the G20 meeting is taking place in New Delhi this weekend. Notably absent is the Chinese president, Xi Jinping.

14:00And I didn't realize, I just read someplace today, it's the first one he hasn't attended since he took over leadership back in 2012. So that's interesting. A lot of people trying to read the tea leaves there. But undoubtedly, if they're talking about the economy, chips, trade and China are going to come up, whether they're there or not. What's your feeling about what's happening in the Chinese economy? Is weakness in China a problem for global growth for other countries? Well, they are. There's no question they're slowing down from their historical growth rates. And we're not overly optimistic on their local growth.

14:44It's also not, I'd say, the words we were using on discussion earlier today was trudging along. It's sort of going, you know, the real estate sector we're kind of bearish on. I'd say, you know, there's been a lot of talks. Will they stimulate? Will they come back to support other local developers? We actually see a number of bankruptcies coming. There, yes, will be some that survive. But there's been some high-profile things from Evergrande to Country Garden, all these things recently. And then what are they going to do to overcome that? And there were some pops actually this week on some hopes that they might stimulate.

15:21words we're getting is that basically the governments, the local governments are tapped out. They were making, you know, part of the stimulus that came in the past was from land sales. They're not doing the land sales now. So they actually, the local governments don't have the capacity to really significantly stimulate. So that real estate issue has overhangs across all sorts of things, but you don't build as much, you don't use as much commodities, and it's a little bit less infrastructure. So that has some down implications. But the local consumer, when you look at their consumption story, you know, the word that we have from our colleague was just there throughout the summer visiting nine cities across the country.

16:00Restaurants were still packed. People were still out traveling and consuming. So there's a good local consumption story, but less of that real estate-led infrastructure, housing-led boom. You know, There's a chart going around today across Twitter, and I even saw it on TV today, was Mexico imports to the U.S. is now overseeing China imports to the U.S. So that global trade dynamics is tricky. I mean, that comes back to how we started with Apple, that the concern with Apple was selling less iPhones to their local government. That tension with the U.S. just isn't going away. And so I think its role for global, particularly with the U.S.-China relationship, just has going to have a longstanding issue.

16:51And so I think that to be an overhang on some level. And I think you're going to see more people think about investing emerging markets ex-China. That's one of the things that we think is a natural conversation is that people should be thinking about China separately. You could say, hey, when people start saying China's not investable, that's what I think there's a good value story. I mean, I remember thinking that when oil back in pandemic was going negative. Oh, you can't invest in oil. That was one of the best times to buy oil. So I'm sensitive to that narrative and being part of that narrative.

17:21Because I say I'm saying, hey, you probably should think about EMX China. but I do think that's probably a longer term allocation to be thinking about is being a little bit more cautious on China thinking more about who benefits from moving away and who as a country you look you talk about G20 being in India I think India is one of the prime beneficiaries I think India is playing off the China news very well they're buying discounted Russian oil but still being a big ally of the US and so they're benefiting from some of this geopolitical tension by playing both sides. They're definitely got their own tensions with China.

18:00They've got some of their own border disputes. But again, they're navigating all these sort of complex geopolitical issues pretty well. Yeah. Yeah. I was just going to point out that it is telling. And some people think it might be because of those tensions. That might be one of the reasons Xi has decided to skip it. I'm sure it's much more complex than that. But it is interesting. And a good reminder that you really have to, if you're thinking about investing in emerging markets or a fund, you really need to check the holdings because a lot of them are heavily weighted with a couple of countries.

18:36And so if you're looking to do something or avoid a certain country, you really need to sort of drill down and make sure that you understand what's in that ETF. So from China to the U.S., we've been asking people, we've been talking about this for the last few weeks, but there doesn't seem to be much agreement in terms of what's happening. And you've seen yields ricocheting all around because of that. Is the economy slowing down? Are we hitting a sweet spot, kind of Goldilocks type thing? Or is there a recession? Or is it too hot? And what's the Fed going to do in response to all of that? We've been asking people for their outlook.

19:10And you can see even this week still, opinion remains very divided. Let's have a listen to some of the highlights from this week's conversations. I think that there's very high risk for a major deceleration of growth into this next couple quarters here. And if that's the case, while a lot of people think that that's going to have an immediate effect on inflation, I actually think inflation could be the actual thing that could be driving lower growth over time. You know, I come from the chemical industry and I can tell you, I've been in this game for decades rather than years. And I've never seen the industry so bad.

19:50All I'm basically trying to say is if what's currently happening in the data and has been happening in the data for the past four or five quarters continues to happen over the next four to five quarters, we will be having a soft landing in the US economy. And this is exactly what Jay Powell outlined at the beginning of the tightening cycle. So if we do soft land this plane, he's going to be very deserving of a big standing ovation and I will certainly give him one.

20:16I should point out, and Darius did talk about this, a soft landing is not Darius's base case, but he's just pointing out and has been pointing out that the economies remain stronger and more resilient than a lot of people thought. So you have to sort of ratchet up the probability that they might be able to hit that soft landing. By the way, because of that divided opinion, just so you all know, starting Monday, September 11, for two weeks, we are going to be going on a journey of discovery with some of the best investors and thinkers. We've got Juliette Clark, Cuppy, Harris Kupperman, Beth Kindig, David Rosenberg, Liz Ann Saunders, Michael Howell, and many more.

20:58We're putting it all to them. Is this a crash or a boom? And how can you profit from what's coming next? So we're going to try to sort of wade through the differences and figure out what's going on. Is it a matter of timeframe? Are they looking at different things? Where are the best probabilities and where are the best opportunities. So keep an eye out on your calendars and we'll keep you up to date when all of those programs are coming out. So Jeremy, where are you kind of in this discussion? What do you see happening with the U.S.? Can the U.S. skirt a recession? I mean, we've certainly upgraded our views.

21:32We were counting us in the group that was surprised. We thought there'd be more job losses, more rise in unemployment than we've experienced. We thought the Fed was being too tight. We'd actually like them to have stopped raising rates already. We're in the camp that inflation is much lower than the official statistics. Like we have our own inflation data point that basically takes the official CPI, but substitutes what's happening in the K-Shiller housing data, Zillow rent for the official shelter inflation, which is officially 7.8 % for the last 12 months. In more real-time indicators, it's only 1%.

22:09And so when you plug in that number, I have a headline inflation of only 60 basis points instead of 3%. And I have a core inflation of 1.6 instead of 4.7. So my numbers say, hey, the Fed is on target. They're done. Inflation is under control. So like when you have that worldview and say, oh, the Fed's way too tight with that saying, oh, well, they should be creating more unemployment if they're that restrictive. And they haven't actually. So we sort of upgraded the assessment of where is the longer term rate going to settle. We might have thought that something like our 10-year tips bond might have gone back to 50 basic points or 1%.

22:54We're at almost 2 % this week, which is, you know, you're at negative one and a half before the bond bear market in 2022. But so there's been a huge increase in real rates that is becoming a better opportunity for the bond market and for longer term bond investors. But you say we've navigated through it without creating the recession. Now you can say, are you just waiting for things to sharply drop off and it's still coming? and and you know it won't surprise you because you do see the economy generally slowed when you raise rates this fast and this high you know now you say who's faced the brunt of these high rates really nobody has right in some ways people refinance their mortgages at low rates so it's hurting the new home buyer but there's a lot of people, the transactions are down.

23:49So if you're a new home buyer, you're really out of luck. But a lot of the people we find at low rates, companies had extended maturities. I'd say that the most pain has been in, if you're in the startup community, or you had to raise capital, that's the people who face the pain, because it's a very different dynamic to raise capital. If you're still trying to make it, the refinancing levels have been hard. But if you had extended your charities, you were fine. Short story is we've upgraded what's possible and definitely have been a little bit surprised on how resilient we've been. We're going to take another quick break to hear a word from our partners.

24:32We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

24:40why do you think that's happening is there something different going on is it is it all the fiscal uh you know stimulus that we saw that's just kind of making its way and it's just hard to to sort of figure out the balance between the tightening and the fiscal do we know what's happening because so many almost everyone's been surprised by this well one one thing that's also that we expected coming into the year that we said might help us keep a positive real GDP, even if we had declining employment, was a big rebound in productivity. And we got official productivity numbers again. And that was, there's been a big rebound this year because last year was a disaster.

25:24And so part of the reason why you're getting pretty good estimates is we're going to hire, last year we had like 5 million workers, but very subdued real GDP. This year, were going to hire half as many workers, but have maybe twice the real GDP. So the productivity doing well is certainly one of the things helping the economy. Certainly the fiscal side, the money in people's checking accounts coming out. Now there's questions of are people running out of all those stimulus money and the pandemic money that was in the system. Is that coming towards an end? Maybe. You got the student loan debt relief coming, rolling off.