Stocks Took the Stairs Down and the Elevator Up

20:15Michael Batnick:Did buyers in Microsoft is like the meme with like the Cheeto in front of the door lock. All right, it's going to break. Let's do some charts. So we had a surge in new four-week highs, which is not bearish in my opinion. Highest level since July 2025. Not bad. I'm a fan of this type of stuff. The next chart comes from, who is this from? I want to give proper credit. Valkyrie on Twitter posted, all right, so what happens when the NASDAQ 100 gaps up 3 %? And he said, let me quote this person, Basically, it's 100 % of the time. All right, 12 times. This has happened 12 times since 2011. Three months forward, 100 % win rate.

21:03Michael Batnick:Worst case, plus 3.4%. Average return of 22.4%. Big gaps usually mark turning points in major bottoms. Now, 12 times is not 174, but it's not zero either. Well, 80 % of the time it works all the time. Big gap. But I mean, it's hard to argue with math like that. But, you know, again, if this, we're still in a very fluid geopolitical situation. You know, right now there's still missiles flying. We still don't know where the Persian Gulf is. But to that point, in each of the examples on the chart, which are basically almost all since 2020, with the exception of the flash crash, which was a unique event, you know, this, I think, points to the post-COVID mentality.

21:48And also actually - But that flash crash, that was the Chinese devaluation. No, that was like a freakish, like it was basically, it's like somebody, a fat finger.

21:57Michael Batnick:No, no, no, because you're right. The real flash crash was 2010. I think this is mislabeled. This is 2015, August. That was the yuan devaluation. Either way. Yeah, and also, by the way, notice that the next like five or six are all that immediate post-COVID recovery year. Not a huge sample size. Yeah, so I can't argue with 100%, but it's tricky. Here's a better one. Chart four. This is from Sentiment Trader. Historically, when the percentage of NASDAQ 100 components trading above their 10-day moving average rockets from under 10 % to over 70 % in just five days, the index boasts an 80%. There's 80 % of 100 % to 80 % of the time.

22:42Michael Batnick:80 % win rate over a one-year time frame. Now, you know what? Well, who cares? 75 % of the time stocks are up one year later. Yeah. All right, whatever. Maybe not so meaningful. All right. One of the really interesting sub-stories in the market, and of course, all we're talking about is, you know, the market in general and oil prices. But inside the market, there's a really interesting story going on. The shift out of the shift, the bloodbath in software stocks continues. It can't even get a baby. It got a baby bounce. It couldn't even hold a baby bounce. and the unstoppable tidal wave of money going to semis and hardware.

23:20Michael Batnick:Warren Pies tweeted, as the Iran war has ebbed and flowed, GPU availability for B200s has collapsed to zero. H100s are close behind. Whatever happens with this war, the AI complex is likely to lead any true sustainable market. Unsurprising to see SMH less than 1 % from all-time highs. And it's this really interesting dynamic where you've got, of course, this AI story and the insatiable demand for the chips. And so not surprisingly, to Warren's point, the semi-stocks are going wild. But the software names that are being wildly disrupted, Microsoft is included. Microsoft is the biggest holder in IGV.

24:02Michael Batnick:I don't know that Microsoft is being disrupted by AI, but I think it's maybe the closest proxy for what OpenAI would trade if it were public. So the three-month correlation between the semis and software has collapsed to its lowest level in a decade from Sherwood. Thoughts? Yeah, I mean, I think, I mean, obviously everyone is freaked out with software because they think AI is going to replace all that, I guess we just don't need software anymore, which is actually kind of a ridiculous statement. Like, you know, you can't run a computer without software. So I think it's a matter of trying to, not necessarily a floor, but people need to have sort of like a vision for some future where like, you know, there is a starting point where software makes sense as a business.

24:48But, you know, for the time being, it just seems like the story is overwhelmingly about how AI tools is going to disrupt this business. You know, to some extent, right, one of the beauty parts of AI is it's a disruptive technology. Well, who gets disrupted first? That's the focus. And you also in the software sector wrap up a couple of nasty elements there because a lot of the software boom was financed with private credit. There, I said it. Um, you know, also this, this, the latest story with this anthropic mythos that I'm starting, that I've been reading about for the last couple of days, which is this, the secret anthropic software that they couldn't release because they're, because apparently it found thousands of bugs and all kinds of published software.

25:35So they only released it to, uh, to trusted firms has to make you wonder, well, what if somebody else figures this out and isn't, and doesn't just, you know, offer it to these other firms. So this is where the focus of fear has come from. To the charge point, you know, yeah, there's a shortage of available chips right now. I'm not going to pretend to be global helium expert. Oh, I am. Okay, good. Because I had no idea that, you know, liquid helium was so crucial or that it all came from the Persian Gulf. But it's not going to make the chip shortage go away anytime soon. Wasn't the T1000 made of liquid helium?

26:15Maybe. I don't know. But I think, I don't know exactly what, I guess you need it though to, you know, to make top quality chips. But so if you're missing, you know, silicon's everywhere. Go to the beach, you have silicon. But if you, but if -

26:27Michael Batnick:All right, none of us know what's going on with software and disruption. Nobody really does. Everybody's guessing. But I think it was Warren actually, who said there's never been a sector or industry group or whatever that was more than 8%, which your software was. that was in a 30 % drawdown, and yet the market's like 3 % from all time highs. This was a couple months ago. But I'm looking at the screen today, and Palantir is down 8 % on the day. It was down like 8 % yesterday, I think. Michael Burry tweeted something about them being disrupted. Palo Alto is down 5%. CrowdStrike is down 8%. These are cybersecurity names.

26:59Michael Batnick:Are they getting vibe-coded out of existence? I don't know. That may be anthropic. Yeah. Seems to be an overreaction, but what do I know? ServiceNow down 8%. I mean, these names bounce for like, they stabilize for a minute. And now who knows where the floor is? So yesterday I had ChartKid make me something. I said, hey, this feels weird where the S &P is up almost 1 % and software is down like 3%. Chart on please, 6A John. So yesterday had never happened. Whoa. All right. So on one axis, we've got the IGV and on the other, we've got the S &P. and you've never had a day where the S &P was up as much as it was with software down.

27:45Michael Batnick:In fact, it's never been down at all. You've never had the S &P up 1 % with software down and software was down 93 basis points. And today it's even worse. The chart today, it's quite literally, I mean, it's off the charts almost. Here we go. Sam, look at this. One of those 20 % periods, right? Yeah. Look at this. Yeah. So the two-day change. Wow. The S &P is up 3.1%. and IGV is down 5.2%. Now, we all might say that this is an overreaction and maybe it is and maybe it isn't. And obviously there's more than an element of truth here. I'm sure Salesforce is going to be under pressure, but it is this really weird dynamic.

28:23Michael Batnick:I don't have the chart here, but Matt made this earlier. The estimates for these software names, it's still at all-time highs. And guess what? The companies are reporting all-time highs. Adobe just reported it in the last couple of weeks on all-time high. and the stock market is saying, I don't care. I'm not looking out over the next quarter. You could, two quarters, three quarters, because we think your terminal value is a fraction of what it is today. So the question that I have for you guys is, how many quarters do you think we would need to see of more all-time highs for the fears to be like, all right, maybe it was overblown?

28:58At least a couple more, I think. And I think, well, first of all, I noticed, it's a very well-labeled chart that it starts since 2001. So it's like you're talking about a software era. So it's like, of course, you're going to have this correlation where software and the S &P is going to have this tight correlation. But if we're talking about a new era, a future era, where it's like maybe software doesn't go away but becomes a little less relevant in the context of how the global economy works, then yeah, maybe you start to see these sort of things that begin to look like outliers that might actually become a trend in the future.

29:35But that's not to say that this stuff won't correct again. But I think you bring up a really good point, though, about how these companies have record high earnings. And maybe even for the rest of the year, they're going to have extremely high earnings and earnings growth. This is actually not about software, but it reminds me of what we're talking about with like the other MAG7 names, the hyperscalers that are investing all this money in these data centers and all this stuff. And while today they're minting insane amounts of earnings and insane amounts of earnings growth, the valuations on a lot of the MAG7 names have been shrinking for months.

30:16And that's not because of earnings that they're earning today and this year. It's because of what people are worried about in five or ten years from now when all these investments come back in the form of depreciation expenses and stuff that starts to collapse the profitability of these companies. So it's possible that, I mean, you know, this is just the stock thing, right? It's not about, you know, what happened last quarter or what's going to happen this year. But it's like, that's just telling us that this is what, you know, maybe the investor or the trader or whatever is imagining a world four or five years from now where, you know, this company is not generating this earnings growth or earnings is much smaller than what it is today.

30:58Although today, for the first time in a while, we've rewarded a company for spending money. With Meta having a nice day-to-day because they're committing to spending, what was it,$21 billion. With CoreWeave? With CoreWeave. So for a while there, they were all getting put in the penalty box, which I think is an interesting tell on the psychology. So the psychology in the software sector, to your point, remains in the toilet. but I think in terms of AI spend, bottom line is people, there's a lot of people who really want these MAC7 stocks to go up. We kind of have to have them go up. Barry Ritholt coined the term closet indexer.

31:37No, he didn't. Didn't he? No way. I thought he did. No way. I was going to give him credit. I'm in your guys' offices. I always credited him with that. All right, we'll find a different citation. But for a closet indexer, one of the things I tell people is, oh, how do I get exposure to AI? I'm like, put your money in an S &P 500 mutual fund. You've got 40 % of your exposure in AI and AI-related stuff. The trick is not being exposed to it if you don't want to be. And so I think that, to me, is an interesting question. To your point, Sam, I don't know that the people buying Meta today are thinking four to five years out.

32:13I think some of the institutional managers who are not buying Meta today and have not been buying it to the same extent are thinking that way.

32:21Michael Batnick:So other public proxies for the AI trade, like nobody wants to own Oracle. It's basically at a new low. If this announcement happened a year ago that Meta was going to be investing$21 billion into Corvive, I don't know the details of the story, but who cares? The stock will be up 19%. Absolutely. It's up 3.5 % and off the highs. Are you kidding me? 3.5%. Better than zero or better than down 3.5%, which I think has been the trend. The more, you know, to Oracle's. point, you know, people said, wait, you're spending all this money for what? And I think so, you know, a plus sign is better than a minus sign, I guess.

32:58Does it make sense?

33:01Michael Batnick:Throw the next chart on. So, is hardware the next software? We're looking at a chart of S &P 500 software, which, you know, obviously has gotten crushed. And look at the hardware. So, I took Apple out of this. It's Dell, Hewlett-Packard, both segments, NetApp, Supermicro, SanDisk, WesternDig. And I know this is a chart-heavy show, so I understand not everybody's watching. But these names are going absolutely vertical. So wouldn't you think that if there's so much fear, forget about the stocks that are getting disrupted by AI, forget about the software names, but the hyperscalers that are so committed, where everybody thinks that their margins are going to come under pressure and their free cash flow is going to contract, because how could it not?

33:45Michael Batnick:Surely then at some point, they're going to pull back and there'll be less demand for the hardware. Does this chart make sense to you? In the short term? Yes. Because if we're all freaking out, think about the logic here. If you're freaking out because all these companies are borrowing bucket loads of money to be able to buy, to be able to fill these data centers, what do they fill? And you'd be like, okay, maybe I don't want to buy the companies that are flipping from cash flow generating machines to roughly cash flow neutral companies. What are they spending all their money on? Well, you just had them all in the chart.

34:18So maybe that's where I should be going. Has it gotten extreme? That's a whole other story. Investing in the picks and shovels versus the 49ers going out there. So this is the picks and shovels market.

34:30Michael Batnick:Sorry, two more charts, then we'll segue. Software to the S &P 500. So relative crash, obviously not pretty. that bounce lasted for about a cup of coffee. And on the other side, semis, new relative highs. And then Microsoft, I would think the poster child for public companies of the AI trade. New lows back to March, 2020. It's really hard to believe with how much success Microsoft, the business has had, the cloud, like all of the success and all of the growth. And you could have just bought the S &P five years ago, six years ago and been in the same place. Well, to your point, though, I think a lot of the rise was because of the open AI buzz.

35:13And now, open AI is kind of a tarnished name relative to Anthropic, to a certain extent. I think that's not completely reflective of it. I think markets get in momentum trends. And as I mentioned, narratives are important. The narrative on Microsoft kind of stinks now. But I think that goes a long way to explaining some of the outperformance. And also, again, remember, the premise here was Microsoft and friends were just, they didn't know what to do with their cash. Now they have to go to the well to borrow money, which means they've got higher, it changes this business model that was always this like perfect storm of, you know, amazing margins and, you know, basically no fixed costs.

35:58I'm afraid of what's going to happen when OpenAI comes public.

36:03Michael Batnick:So they just raised$120 billion in the private market. The largest capital raise ever in the history of public markets was$25 billion. And they just took$120 billion in private markets at an$830 billion valuation. I didn't, I mean, who knows? Right. Okay. The market is, it's fluid and the market environment changes. But I think that if OpenAI were public today, the stock would be going down every day. I agree. and I think this is one of the, to me, an existential risk that I think we need to focus on. It's hard to value. I don't really, you know, but you've got SpaceX coming public, which is going to be the largest IPO ever.

36:43And if retail, if it's as big as threatened and 30 % goes to retail, retail's got to come up with$25 billion. And then it's going to go in the index, 15, at least in QQQs in the MDX, 15 days later before it's even seasoned. And so, you know, that's a huge one. And then you've got Anthropoc potentially going public, OpenAI potentially going public. Is there enough money to support all this? That's the open question. I don't know. I don't know. You know,$22 billion, they're certainly going to have to sell something. If you're in Vesco, you're certainly going to have to sell parts of 99 other stocks to be able to afford to buy, to put SpaceX in your account.

37:30I think this is a, you know, it'll be a grinding of the gears, but I do think this is a risk that people have to look at. One of the beauty parts of investing in the market, and Sam, you've had a, you know, you've, I think, hit on this for years, is that the supply demand for stocks has been pretty good, right? Because you've had - More buyers than sellers. Well, but besides more buyers than sellers, You've had private company, you know, buyout firms taking out a lot of companies, reducing the supply of stock and buybacks, which you can argue whether they're reducing the supply of stock or just, you know, keeping the treadmill running to buy back the stuff they're issuing to people.

38:09The supply demand calculus has been very favorable. This will change it. Sam, can the market digest$2 trillion IPOs? I guess we're about to find out. But yeah, like to your point, yeah, for years, all we've been hearing about is the, you know, the number of publicly traded companies shrinking. And, you know, there's not enough stuff to buy out there. So that may be driving up the premiums everyone's paying for the stocks that are out there. But I don't know. Like, I don't want to be that guy. I don't want to be that guy. But it's like, you know, I remember the last time, you know, an extremely buzzy private company with, you know, executives and founders that are on the cover of, you know, magazines and speaking at every event.

38:55Was it Baba? No, it kind of reminds me of when Blackstone went public in 2007 or something. Cut his mic. Like, again, listen, listen, like apples and oranges and whatever. But it's like there's something about a coming, an IPO that's coming that has all these people so excited about getting a part of it that it's like.

39:16Michael Batnick:It does feel like a tidal wave that's like 500 miles away. Yeah, because everyone's going to buy it on day one. And it's like, all right, so who do you have left to trade this thing? It's people who are trying to cash out. Yeah. All right. I saw a chart from JP Morgan's Guide to the Markets that blew my face off. Chart 11, please, John. We're looking at consensus estimates for 2026 earnings per share growth. And everybody is basically, you know, sort of neck and neck. There's one huge outlier and it's EM. And I thought to myself, what the hell is going on with EM? Consensus estimate earnings are up 35 % year over year.

39:46Michael Batnick:And, you know, the spoiler, it's not much of a spoiler at all. It's semiconductors. So I had our trusted friend, Claude, make me a chart of what's going on inside of IEMG. Oh, this is Claude. This is Claude. Oh, this was Claude. Very nice. So, yeah, no mystery here. 21 % of the portfolio is semiconductors. You've got TSMC, biggest manufacturer in the world, at 11 % of the portfolio. Samsung is 5%. SK Hynix is 3%. 32 % of EM is tech. And remember when EM, I know you guys do, it was like an energy proxy. It was like the brick trade. And wow, the index has reinvented itself. Well, because, you know, yes, to your part, it was resources.

40:26Because essentially, emerging market meant underdeveloped. I've never been to Taiwan. My kids have been there. I've been to Seoul. My kids have been all over Korea, actually. It is not an underdeveloped country by any means. You could argue that things are much more advanced in many ways than they are here, except the capital markets are not fully open to the same way, so they get classified as emerging. You know, Samsung is not exactly the scrappy, you know, new economy company that we're trying to figure out what they do. Right.

40:59Michael Batnick:I think last year, international stocks outperformed the S &P by the widest margin in a long time. Now, listen, you zoom out long enough, it looks like a blip because the U.S. stocks have outperformed for so long. But I want to ask you guys, like, are international stocks, does this trade have legs? Because there is much less exposure in international markets. John, chart 14, please. Much less exposure to things like software and much more exposure to some of the things that are working. And just technically, this looks pretty damn good. If this were to roll over and break down, it would be a funky chart.

41:34Michael Batnick:This certainly looks like a bottom. And it looks like a continuation pattern that this is going to take out new recent highs. It looks like this trade is going to continue. I think it's absolutely something worth watching for a reason that I think kind of flies under the radar. And it's that a lot of these countries are actually starting to push through reforms and efforts and policies that are focused on enhancing shareholder value. I think China, Korea, and Japan, they all have policies that have been rolling out for the last couple of years where it's like, you know, it's not good enough for your companies to be making money.

42:16I mean, listen, companies everywhere, including across Korea and Japan and Taiwan, like everybody makes money. The question is, you know, why isn't the stock price going? Why aren't the stocks going up further? It's because the earnings growth isn't there. So it's like, you know, how do you get this? How do you get people to change their attitudes? Because it's like, you know, you can go to work, you can run a company, you can employ tons of people and never have layoffs if, you know, you're making a billion dollars every year and that's it. But if you have no earnings growth, the stock price isn't going to go up.

42:48So I don't know the details of how these reforms work, but I think it's something to be very excited about as a person who's exploring international markets. Because if the story of earnings growth starts to turn around regardless of if it's in Asia or Europe or whatever, then yeah, then you suddenly have an interesting stock market. Well, you know why?

43:12Michael Batnick:Because there's been so many people over the last couple of years like, listen, I don't want to be overly reliant on the MAG7 hyperscalers, but where else are you going to go? International? No, that's not working. Well, now it's working. Well, there's your point. Exactly. I think, you know, first of all, in a secular sense, there are two things that have been helping international investing as a whole. Number one is, you know, I think we've at least started to recognize maybe value is not to be tossed away at the expense of growth. So we have seen a rotation from growth to value. It's not exactly a gold rush here, but that move has been occurring.

43:52Well, if you're looking for value and you're, well, there's a lot of value in Europe, to Sam's point. These companies make a lot of money. They don't grow very fast, but they're stable. I think also at the same time, I never was a big believer in the sell America trade, but I do think that a lot of international investors are saying, you know, maybe how about we keep a little more money at home rather than just buying these same stocks in the US. And so I think those two combine to give a bit more of a basis trade, a value basis, I should say, to international investing. I started it doing, my first job was international equity arbitrage at Solomon Brothers, which meant I was up all night and things of that nature.

44:35It was a little unsustainable as a lifestyle. But, you know, there's always been great companies around the world. Now, I'll actually argue it's never been easier to invest in these great companies around the world. Self-interested plug, we offer access to, I forget how many markets now, 50 or something like that. But the point being, it's really easy to access international investments. And I think if you're starting to think from a value point of view, if you're starting to think from a geographical diversification point of view, because a lot, you know, are we the cleanest dirty shirt in the drawer, so to speak, anymore?

45:10It's not clear that that's the case. And so if there's other dirty shirts in the hamper, maybe we pick a different one. You know, the drawer is not that dirty.

45:18Michael Batnick:Yeah. We are about to enter an earnings season and estimates are on their way up. Are they not, Sam? They're on their way up. Isn't that crazy? It's like every week we get an update, you know, from FACTSET and the places that survey this stuff. And it's like even through last Friday, and we're going to find out tomorrow that earnings have been revised up for the last, every week, even since the beginning of this war. Like, it's crazy. But that's what the analysts have figured out. And this is what's being communicated by the companies to shareholders and all this kind of stuff. Yeah, they're all acknowledging the fact that things like higher energy prices are going to eat.

46:01It's a headwind. And it's going to show up in their books when they report, not just in Q1. I mean, that's another thing that's interesting. They have a full quarter of experiencing this. And that's going to be reported in a couple weeks. but they're going to start telling us about how this stuff affects them in Q2, Q3, and Q4. And all the indications so far is that, you know, it's not that bad. And in some cases, it's, you know, we're actually doing better than we were at the beginning of the year.

46:30Michael Batnick:Sam, you brought a few charts from Deutsche Bank showing the percentage of stocks beating earnings estimates and the aggregate size of the earnings speeds. Anything interesting in here? No. I mean, I almost hate this. I have to repeat this. I have to repeat this. I repeat this every quarter because it's like, you know, you turn on the TV, you know, no judgment to anybody because the nature of the storytelling is slightly different. But this whole matter of, you know, a company beat earnings expectations, it's like that. You don't get any information from that because historically, you know, more than half of the S &P 500 is always going to beat expectations.

47:08and you know on average it's like 70 to 80 percent of companies will be like 80 percent right well yeah yeah don't finish and then the and then the other thing too and this is hilarious it's usually with a by a margin of about five percent and that actually you know if you extend that all the way back to like the 80s that's also the case because um one of our friends nick colas at data trek you know writes about this every once in a while he says um you know at one point he was considered one of the most accurate analysts on Wall Street. And he's like, this was the way he did it. And he's written about this.

47:41The way he did it was he waited until like earnings season rolled around. And then he just saw what the consensus estimate was and he added 5 % to it. It's funny you said it. My father was an industry analyst for his career. And he, this first, you know, one of the, a certain large company that was known for beating estimates. It's a household name. No, based in Arkansas.

48:07Michael Batnick:Oh, okay, that one. And, you know, what would happen would be he'd get a phone call. It would be, you know, you're at 50 cents. I think you're a little high. I think you're going to have 50 cents. I'm looking at your numbers. It's 50. You really need to go down to 48, 49. And so everyone on the street, because they didn't want to be shut out, would go to 48, 49. Guess what the number would be? 50. And so, you know, yeah, so this isn't Jack Welch pulling, you know, pennies out of the couch cushion, which eventually couldn't happen anymore. And so to me, I look at earnings season with two things in mind.

48:42Number one, beating your published estimate is a necessary but not a sufficient condition for a rally. You have to do it because everybody else does it. And number two, part of a CFO's skill set at this point is managing the street as much as it is managing your bottom line. And so the fact would be that, again, you know, I keep saying it, you know, 75 % of the time works all the time. But if 73 % and as much as recently as 80 % of companies beat, that's not, there's, to your point, Sam, there's not a lot of information context. Everybody's looking toward guidance at this point rather than, and I think also, it's always, because to Sam's point, you're not learning anything.

49:27The other thing I'd also, another thing that I was taught early in the game was watch free cash flow. Because a company can fudge its earnings to a certain extent. You could always, you know, time it differently, call it non-recurring. You can't fudge cash flow. You know what?

49:45Michael Batnick:You did the CFA stuff. Those formulas suck. There was like six different ways to value free cash flow, free cash flow at a firm, free cash flow at this and that. And a lot of publicly available sources of data don't publish free cash flow. It's not like a line item statement. Some companies report it, most do not. And so I was always like, well, how do I find the free cash flow? Well, guess what? Now you can. Now chat, Claude, anybody can give you the free cash flow in two seconds. Yep. Yeah. Yeah, it's great. One last thing I will say though, in terms of - Oh, what? On this chart that is boring?

50:19Yeah, the chart that's terrible. You connect this and you connect the expectation, you connect the beat rate, whatever, with what's already been established in terms of, you know, the Q1 estimates. Now, admittedly, this is backwards looking. But again, you know, this is also factoring, you know, at least one month's worth of, you know, Iran war uncertainty and energy costs, even though energy is going to come on a lag for most people. The fact that we haven't had a whole lot of negative pre-announcements, in fact, we've had some positive pre-announcements, suggests that, again, this is going to hold up again, which is actually something to be encouraged about, considering this also includes one month of war.

50:58As a long-term options trader, I'm going to say that in some ways that scares me. The reason being, when you don't have earnings warnings, when everybody's excited going into earnings, the bar has gotten raised pretty high. So you have to jump over a higher hurdle. That's a number two, the thing that specifically about this one, and I have to be careful how I say it because it, but despite all the tragedy that's going on in the Persian Gulf, if you're a CFO, this is the greatest excuse ever, right? You know, you don't have, they were probably like talking about, well, wait, the first six months were snowy.

51:38We could talk about weather. This blows it away. You know, where's your guidance going to be? I don't know. I have no clarity because of the situation in the Middle East. I wonder how many times we're going to hear that. And the question will be, is the market charitable to that or not? But I think you're going to, and you did raise this point, but the cynic, the risk manager in me has to say, like, you know, is this going to be a legitimate explanation or is this an excuse? By the way, this is the second chance the CFOs and execs have because they could have done this last year in the wake of all this tariff uncertainty, right?

52:18Trade policy uncertainty and cost uncertainty and our moving around our vendors and all this stuff. And it's very easy to slip in, you know, laying off a department that was, you know, obsolete or whatever and fold that in and bury that in your expenses. So it's like if you didn't do that already last year, it's like this is your second chance. And if they don't do it, then it's probably a reflection that the businesses are in incredible shape.

52:41Michael Batnick:You make a really good point. If everybody is bullish, then if the bar is higher, it's going to be harder to move the stock prices. Yeah, beating expectations is not expected. But the good news is that even though the analyst estimates are high, I would be seeing a much different tune if the stock market, and forget about the indexes, right? Let's just talk about the individual names. if the breadth of the market prior to like today, but just was, uh-oh, this is good. Listen, we're priced for perfection because 90 % of stocks are above their 200 moving average. Like there's no, the bar is too high.

53:15Michael Batnick:That's not the case. There are a lot of names that have been beaten to absolute shit. And even if they only beat by a penny, you could see a re-rating way higher very quickly. There's no question that a lot, that in some cases the bar is set, you know, like for a little, you know, kid to hop over it and that, you know, software company, I don't know that the market's ready to do that, but for them, it's not going to be as hard for them to, to, to leap over this bar for a lot of these other companies, um, where the market's pricing in all good news, you know, it's, it's just gets a bit trickier.

53:49Yeah. Um, yeah, exactly. Exactly. Like it's, especially with the software names, but I think another good example of this recently was like the Delta earnings, right? It's like going into the war. I mean, I remember coming back from Future Proof, right? And I was on a plane watching CNBC, and you see all these charts of the airlines sinking because of war tensions and oil prices rising because their entire cost structure is jet fuel prices, which have been skyrocketing. And the next thing you know, they have a decent earnings announcement. The stock's up 12%. Didn't hurt that it was coinciding with a rip-roaring day anyway.

54:26But yes, to your point, the market was already predisposed to take that well.

54:30Michael Batnick:There was a quote from, I think, the United CEO or CFO who said something like that we're already projecting$10 billion in higher fuel costs for the rest of the year. And for some perspective, our best year ever for some sort of metric of free cash flow was$5 billion. Yeah. So just to show the scale of this, but it does come back to earnings and we're going to see what we're going to say. All right. In the time we have left, we want to talk about the queues. We want to do some stuff on rate cuts, options stuff. When do we want to go next? Let's do it. Deal the story. You throw it out and we'll, how about we do a little bit of a lightning round?

55:11Michael Batnick:Lightning round. All right. Well done, Sam. So let's do a minute or two on each. All right. The queues. this is like maybe a sort of a boring story, but it's kind of interesting because the Qs have had a stranglehold over the NASDAQ 100, Invesco for a long time. And are there, maybe there's deals I don't know about. Why has this been the case? It's 18 basis points, not exactly a low fee product. Now there's, the Qs are structured as a UIT. There's all sorts of interesting deals where a lot of it goes to NASDAQ and it's like a loss leader for Invesco, whatever. But you've got iShares filed for one, and now State Street.

55:51Michael Batnick:What is the deal here? I'm not sure on the legal specifics. I mean, I do think there was probably some exclusivity, SPX style, whereas SPX is only on SIBO, et cetera. I don't know the details there. As far as I'm concerned, as a user, as a brokerage firm, bring on the competition. We talked earlier about SPY versus VOO. And of course, there's IVV. why shouldn't there be more than one? Why shouldn't there be more than one QQQ? I think that's the simple way to think about it. Yeah. Competition is good. And every day there's like, you know, 100 bullshit ETFs that are launched. Why not, you know, try to take a chunk of something that's actually successful?

56:30Yeah. And especially, I mean, the main thing being that if you can put it out there with a lower expense ratio than the current market product, then it's like, it's a no brainer.

56:38Michael Batnick:I'm guessing that Invesco was paying NASDAQ for exclusivity. I don't know why I have to guess. that could probably, there's publicly available information. We'll check, Chip. All right, dude, where's my rate cuts? This is, this to me is the, is one of the crucial points when it comes to thinking about where the stock market is. Okay, well, we came into this crisis. That was literally, by the way, dude, where's my rate cuts was actually literally something I wrote in our ibkrcampus.com, by the way. And what I did was basically, I went back and said, where, you know, I was looking at the Fed funds futures and we were, before the shooting started, end of February, we were pricing in, we, Fed Funds Futures, we're pricing in two rate cuts, plus call it, I think, 40 % or 50 % of a third rate cut.

57:19As of yesterday, we're pricing in a 25 % chance of one cut. So we've taken, call it 60 basis points off the table in terms of rate cuts. I was like, is this unique to the US or is it not? It turns out the rest of the world is doing the same. The UK actually flipped from like 50 basis points of cuts to 50 basis points of hikes. The Royal Bank of Australia is a little lower because they raised rates already once. Bank of Japan's in its own little world. But when the euro zone is similar, Bank of Canada is similar. So again, this is why when I went back to the point earlier about stocks being essentially unchanged over this period, all things being equal, if I told you we were taking 60 basis points of rate cuts off the table, you'd think there'd be some negative impact in stocks.

58:06But that tells you the power of positive psychology. And I'll add a counterfactual to that. I think it's possible. I think another way to think of that too is if we weren't, if the rate cut odds weren't falling, then maybe stock prices are actually higher and maybe valuations are higher.

58:24Michael Batnick:Oh, that's fair. Okay. So given all of this, let's assume that nobody could see the future that this market clearing event has happened. Let's just assume that there's no further escalation. Okay. So all of the headwinds of higher crude oil, higher interest rates, maybe rate hikes. Nobody actually thought rate hikes were coming, but the market was pricing that in. A higher dollar, all those higher inputs, all of those headwinds easing, everybody back in the ship. And oh, not to mention that seasonally, this is a very bad year in terms of midterm election years. And it is a very bad time of the year.

59:04Michael Batnick:This is tax season. This is, and Warren, my friend Warren Pies, friend of the show, has done great work showing quantitatively this is a drain on liquidity. Like literally this week, it's not great. And yet we are, the market close higher today, near the highs of the day. We are in, okay, everybody back in the boat. And as dire as it felt over the last couple of weeks, as much as we had this sense of anxiety and uh-oh, like the market's going to take another leg lower, it never happened and the bulls can come back. And absent another catalyst to send us lower, with strong earnings, they probably will be back.

59:42I don't, you know, I don't know that they ever left. But, you know, there's always something out there. And again, we've raised a few of them. Oh, they left. The sentiment got pretty bearish. The sentiment did get bearish. But again, the drawdown wasn't very big. And, you know, again, we've got the, you mentioned the midterm elections, which can be rocky. New Fed chairs have an interesting way of getting tested when they take off. They do. Right? But that's a coincidence. I don't know about that. I mean, well, the Greenspan one. Greenspan, literally, the market crashed like six weeks after he took office.

1:00:13But Bernanke, the global financial crisis happened not long after he took office. Yellen got to kind of skate through. And Powell, I forget what it was for Powell, but Powell had something big happen shortly after. So there's sort of a history of Fed chairs getting a real-world test. And again, we talked about the supply-demand dynamic potentially getting upended. That's the one. So those are the things that I want to keep an eye on. Yeah. It's very early in the year. Like, let's not rule out the possibility that we get like 14%, 18 % max drawdown. Never can. Yeah. And listen, by the way, that's expected, right?

1:00:49And even in those years, most of the time, 75 % of the time, it's literally 700 % of the time. Even with those max drawdowns, you end up in the year higher. All right. Options. What happened on Wednesday, Steve? Well, what happened on Wednesday was going into this number, I, I, I look, you know, on Tuesday, I put out a piece, um, basically, you know, I think I called it markets hoping for a taco Tuesday or something like that. But literally what I looked at the S &P 500 and said, wait a minute, the, the normally, and I, I'm doing this and I know a lot of you are listening and not watching. Yeah.

1:01:23No, see, visually do it with your hands. So normally, normally the skew on the S &P 500 is negative, but this is a probability chart. Wait, what does this mean? Nobody knows what you're talking about. Yeah, thank you. This is years of an option trader. When you plot the implied volatilities by strike for a given option, typically people are willing to pay more for below market options, out of the money puts, because that's insurance. Implied volatility. That is the plug-in. Basically the amount of premium that you're willing to pay for an option. So you're typically willing to pay for index options more for insurance, downside options than you are for upside.

1:02:02This is a, and then you can actually impute probabilities out of this. This was actually another, this was actually an idea that sprung out of Thomas Pederfries had to come up with a graph like this. Oh, he invented the skew?

1:02:12Michael Batnick:No. No, Barry Reynolds invented the skew. Barry Reynolds did not. It was actually traders in 1987 because they used to just price options all with the same implied volatility. And then people realized, oh, wait a minute. You get, that's not, that's not a good move. If you could take a time machine trade back then. Skew arose in October of 87. But what this is, basically from all the skews, you take the likely probability. On Tuesday, markets were pricing in a move to 67.50. It's telling you people were bullish. People were expecting a bullish outcome, whether that was FOMO insurance or whether that was speculative.

1:02:53There was literally this bid under the market. And that's what I was pointing out on Tuesday was the base case was, although in talking about it with people, it was kind of freaky on Tuesday.

1:03:05Michael Batnick:Well, because Tuesday was the day that Trump tweeted, we'll wipe out a solution or whatever. And I was talking to Josh and the point I was making was like, how dumb do you think the market has to be for it to be down 20 basis points right now or whatever it was? You think the market is that wrong that there's going to be a global catastrophe that night? No, the market doesn't under react to risk. Yeah. And the charts that I've found, whether you're into options skewer or not, but this chart telling you that the maximum probability priced in by SPX options was for a rally to 67.50-ish or so. So everybody knew in hindsight.

1:03:43Michael Batnick:And of course, hindsight is 20-20. But it wasn't hindsight. That was foresight because I did this on Tuesday, not on Wednesday. Touche. Nice. Touche. Touche. Okay. And lastly, we won't hear this. It's a bummer. But Disney, they announced some layoffs? Well, they have a new CEO coming in. Yeah, a new CEO coming in. I mean, okay, this is just sort of a speed run, an educational crash course in dealing with news headlines. Yeah, so Wall Street Journal reported that the new CEO is going to cut about 1 ,000 jobs. All right? If that's all you see, it's very easy to start to extract all these macro stores.

1:04:21Oh, it's more layoffs. Is this AI? white collar, all these things. All right. So a couple of bullets. One, Disney employs somewhere between like 150 ,000, 200 ,000 people. So it's like already it's sort of like one percentage or less of their workforce. And so companies lay off people all the time. And so if you're that big, like this, this could be a run of the mill sort of churn in their office. Two, there was no mention of anything in terms of stuff like hiring freeze or headcount reduction. And if those things aren't paired with layoff announcements, then it's like, you know, they're going to have, they're going to replace all those people potentially.

1:05:00And I dropped this in the doc. I don't know if we caught this, but if you actually go to the Disney LinkedIn page, there's 1300 open roles. And again, this is not totally precise, but this is literally active job listings on the Walt Disney site. Maybe it's In reality, it's a lot smaller than this, but the point is this is not zero, which means the net headcount at Walt Disney is not going to be shrinking by 1 ,000. So this is just both the business and the macro story. And then, again, all that stuff can be echoed out, amplified out into how we think about macro narratives too. Even in a healthy economy, the U.S.

1:05:41employers are laying off somewhere between a million to a million and a half people per month. So it's like layoffs are going to happen regardless, even during economic booms. And that million to a million and a half people a month that get laid off. And listen, it's awful. Like, again, there's no downplaying the human toll and the stress that it brings. But as people invest in the market and think about the economy, this is run of the mill in terms of from a statistical perspective. And by the way, the one to one and a half million layoffs per month represents about 1 % of the employed labor force.

1:06:14So when you hear or read, you know, stories about a company doing a ton of layoffs, yes, absolutely. It's something to pay attention to if you're exposed to that stock and you care about that business and you have family who work there and all these things. But, you know, be wary about extracting some big macro narrative because it might actually just be run-of-the-mill economy working.

1:06:34Michael Batnick:All right. I won't do it. Lastly, the economy, it is weird because there is this continued disconnect. The economy is fine, but we keep seeing corporate profits all over the place at an all-time high, maybe leading to confusion, further anxiety. Why is the stock market up? Why do I feel so bad? And the labor market is, it's not frozen, but there's not a lot of hiring. There's not a lot of firing. It's weird. It is kind of a no hire, no fire. You know, I guess the key here is, you know, it's important for everybody to remember, the stock market is not the economy, nor is the economy the stock market.

1:07:14But they're inextricably related. But in general, you know, today, again, we shrugged off the fact that GDP came out with a 0.5 revision today. So that's not exactly a rip-roaring economy right now, along with a 0.4 % rise in PCE. That's, you know, stagflation very light. But yet at the same time, and I think, Sam, you brought this up in the charts that we saw, was you described the chart better, but it was basically that net incomes are starting to fall, but yet spending is continuing to stay stable. It's hard to imagine that goes on for too long without some pain. And I guess the point being there is when people wish, and I know we talked about rate cuts coming off the table, but when you wish for rate cuts because the economy is slowing, don't do that because the Fed is usually late and you don't want a weaker economy.

1:08:05If you can cut rates because monetary conditions are solid, sure, that's virtuous. But you should always be rooting for a stronger economy. Yeah. And in terms of closing that gap between stuff like the earnings growth story at the corporate level versus all the economic data, that seems to be somewhat gloomy. You know, this is sort of like, you know, this is calculus, right you know first second derivative changes or whatever like the bulk of the data when it comes to the economy is mostly about deceleration and flattening out in terms of growth or whatever like we we went from you know creating tons of jobs to you know now we're sort of you know hovering that sort of break-even level we had rip-roaring personal consumption expenditure growth but it's like that's starting to plateau off a little bit nothing is really falling off the cliff right now, which is not, not exactly not yet.

1:08:57And, and to the point about like the no hiring, no firing economy and layoffs being relatively low, that means people are still going to work and they're still getting their paychecks, which means that they can still afford, you know, the trip to Disney world and all of these things.

1:09:10Michael Batnick:All right. Sam Ruff, people want, first of all, this is great. You guys had a good time. Thank you. I can't, I hope you, I hope to come back This was a lot of fun. Absolutely. You will definitely come back. Sam, for people that want to follow Ticker, where do we find you? Yeah, just head to ticker.co. That's T-K-E-R dot C-O. If you haven't signed up already, you know, I have a free newsletter that goes out. And if you reply to that, I'm happy to toss people some free months to see what they're missing. Hell yeah. Well, I never miss it. Steve, I want to, dude, where's my car? I want to get some of your shit.

1:09:40How do I find you? IBCRCampus.com is kind of where our learning stuff is. There's the Traders Insight tab. You could search for me. I publish, I try to do something every day. It doesn't, life interferes. Yeah, sure. But, you know, I try to put something out when I can. And our stuff is all free and accessible. Hopefully to get you on our site, stick around and open an account someday. And the platform, why do people choose Interactive? Breath of product offering. Basically, you can buy futures, options, stocks, all from the same account, foreign currency, all in the same account. You can access pretty much the entire tradable world from a single account.

1:10:18And we do it at a very low cost. And so to me, that's a pretty good value proposition. All right, gentlemen. Awesome show.

1:10:27Michael Batnick:Thank you for coming on. Listeners, like, review, subscribe, rate, all that good stuff. We will see you next time. All right, Justin. Wow, thank you.

1:10:47Thank you.