The Case for a Year-End Melt-Up

21:43Downtown Josh Brown:Do you think that that calms down and the market kind of focuses elsewhere? Or do you think people are like, oh, great, NVIDIA beat again? I don't care. It's still a bubble. What do you guys think is going to happen?

21:56Michael Batnick:It depends on what happens to the price. If the prices continue to go up, the stocks, nobody's going to talk about it. If the price struggles, like let's say NVIDIA gives up all the gains today and closes red. then boom, the focus is going to be right back on that. So I think it's stock market dependent. Warren, what do you think? I totally, totally agree. I mean, we invent the narrative to follow the price. Ultimately, nothing's going to change fundamentally between now and the end of the year. But I think the important thing, because I was on CNBC, I guess it was last week, late last week, they asked me the same thing.

22:27Like, what do you think about the market near term? I said, I think the sentiment's worked off. I want to see not what NVIDIA says. I want to see how the market treats NVIDIA. I knew NVIDIA was, we track this stuff daily. We track the pricing and availability stuff daily. We knew they were going to blow the quarter away. It was just more about how's the market react. And I still want to see that. It looks like we're going to be fine. But I want to see how we close this week off in particular, how we print on Friday at close. And that's going to dictate the narrative going to the end of the year.

22:58I expect it to be good. And I expect it to be bullish, though.

23:00Michael Batnick:So let's talk about the rest of the market. Because Warren, you're right. It has been the leadership has narrowed, just continues to. Like a couple of weeks ago, we were talking about the rubber band between equal weight divided by cap weight was already stretched. And then it just snapped and like crashed low. And now that was a local top, but it's just it just continues to happen. So you mentioned this earlier in the show, John, throw these charts on. So half of the index, half of the constituents in the S &P 500 chart three trail the index by 10 % or more, which is not quite off the charts, but we're getting there.

23:39Michael Batnick:And then you also mentioned that more S &P constituents trailed the index by 20 % than are beating it. What do you take away from this? I think this is what we're talking about. If you look at the equal weight, another chart we don't have in this, but you look at the equal weight to start of all these bull markets, it leads usually. Equal weight is off the bottom. We said a bottom. Equal weight leads. Small caps lead. Low quality, high beta leads. This has been a straight grind lower in the equal weight. It's been a straight grind lower in small caps relative to the S &P 500. I mean, this is a brutal market because in order to beat the market, you can be at your benchmark.

24:21But in order to beat the market, you have to allocate an overweight to these tech positions. Nobody wants to do that. You already feel overweight. Like it's 50 % of the market at this point in time.

24:32Downtown Josh Brown:So yeah, that's what I take away from all that. You know why nobody wants to do that? Number one, they don't actually think it'll work. They think, my luck, I'm going to get overweight NVIDIA and Apple and Microsoft right at the top. And then you can't answer for it. Like in other words, if you build a diversified – diversified. If you build a portfolio with like 60 positions, right, which is pretty diversified for like a long only, especially for a hedge fund, like you're not going to live or die based on any of them. You're definitely not going to beat the market. But you won't have to apologize.

25:12Downtown Josh Brown:If you come into Jan 26 and you're three, 400 basis points ahead of the index on some of the largest stocks in the country and those stocks start the year off badly, then you're apologizing. You're an index fund on steroids. That's what I'm paying you 2 and 20 for. There's two reasons nobody wants to do it. The first is they don't think it'll work. And that second reason is even worse. It's like, I can't even explain this if it goes wrong. There's a lot. You could explain a 60 position portfolio that trails the benchmark because of course it does, right? You can't explain being overweight, the top five market caps.

25:56Downtown Josh Brown:And like, what were you, what were you thinking?

25:59Michael Batnick:Don't you think that's what's sort of prolonging this warrant? Like there is, it's hard to say that there's so much underinvestment to these names because NVIDIA is a$5 trillion market cap. But Josh's point is so important for market psychology. Yeah, I mean, we have looked at this. So the pattern of this bull market, you hear this, it's just replete. I don't know if I put a chart in there. And I think I did, actually. It's chart. If you skip all the way, just to give you something to reference, if you're watching, if you skip, well, I guess I didn't put it in, sorry. Anyways, there's been a consistent pattern where the mega cap leads, the rest of the market falls apart, and you get a wobble in the market, just like we had recently.

26:37You get a wobble in the market. And then everyone comes on TV. Everyone expects, hey, we're going to get a broadening. We're going to get this broadening. Equal weight is going to take the baton. The cap weight is going to give up. But yes, we do get a bit of a broadening because the bull market continues, but it's never a leadership shift. The leadership has maintained each one of those little cycles. it maintains in these large caps. It maintains in the tech sectors like comm services, tech, Amazon, those stocks. That's the pattern is you get a little bit of a broadening, but never the baton actually being taken by the other 400.

27:14Downtown Josh Brown:Well, they're not big enough. Well, they're really not big enough. Like there are health care companies that are three and four hundred billion dollars. There's a couple of energy stocks that are a few hundred billion dollars. but like they're just not was last week we had this amazing rotation into energy and healthcare and a lot of people played it a lot of people made money because some of these stocks went up huge like uh the amgens the app v's um saw some saw some nice moves in uh the refinery stocks but they're just not big enough to become the new leaders and they definitely they definitely are not going to be telling stories about uh 20 year-over-year revenue growth as far as the eye can see.

27:55Downtown Josh Brown:They just, they can't do it. There was a physical constraint to how much those companies can grow. And those were just, I think those were the new era defensive because like utilities are now part of the, they've gotten sucked into this AI trade. So it's not a defensive anymore. So you have healthcare and you have energy. We've been making the case for a long time. Energy is your best diversifier in the market. Not that you want to be overweight or bearish on oil, been bearish on oil all year, but But it's doing things that nothing else is doing. So I think that rotation, healthcare had been so beaten up until that move.

28:25And you can just see this coordinated shift in flows over to healthcare, over to energy. And it's kind of where we're at with the pods and everything.

28:34Downtown Josh Brown:Yeah, they're just not$2 trillion companies. Like Eli Lilly is gigantic by healthcare standards, not by stock market standards.

28:45Michael Batnick:Warren, I want to ask you about one of the reasons why you're one of my favorite thinkers, writers, is you take a broad, you're able to zoom out and then zoom in. So you do the market, you do the labor market, you do construction, like you really, you do Fed stuff, you take a really holistic view. Josh and I were talking about this yesterday. So one of your recent reports on the K-shaped economy and the K-shaped market, it's really confusing because there's no doubt that the bottom 10. 20 % are still under pressure, as they always are, but especially now with inflation, the cumulative toll of inflation.

29:21Michael Batnick:There's no give back. Prices don't go lower. Everything's expensive. It takes a toll. Of course it does. But also, I think what's confusing is you hear from so many different companies that are taking cover, in my estimation, that are taking cover under this narrative and using this as an excuse to say why it's not that we're not executing, it's our where consumers are under pressure. So you hear this from Cava and all of the bull companies and Chipotle. And you hear this from like Target and companies like this. But then you look at Walmart, who serves a similar clientele. And then you look at SoFi, who also serves a young demographic.

29:58Michael Batnick:And so there's companies that are executing really well, despite the pressures and despite the headwinds. And there are companies that are just not executing and are using this as blame. And I think fueling the flames. And it's not to say that it's not a story, but it's really, what is the story? So sometimes you have a narrative. It's not like, I think that's what you're asking is basically, is this narrative real or is this just like BS that the companies are using to excuse away their, their problems? And I think it is real. You know, I, I think that, uh, that the, what we went through after the pandemic has really, uh, impacted as it's, it's, it's, I, when I went back and listened to myself on the podcast, like a year ago, I use the word bifurcated economy probably like a dozen times.

30:41It's like the K-shape sounds a little better, but the bifurcated economy is a real thing. And the pandemic just really set fire to that division between the haves and the have-nots, the asset owners and those who don't own assets. And so to me, when I look at it, I think the lower part of the K is best represented. And it's not everything, but by the housing market and housing affordability. If you gave me one chart to kind of set the table and explain the dynamic, Like market at all time high, housing at all time high, gold at all time high, Bitcoin at all time high. All these things are doing well.

31:15Yields pretty have been OK. You know, bonds been good this year. But what's the one thing, one chart that could explain this this lower K? It's this housing chart that I have. It's page or chart number 14. We're showing the amount of the percentile of household income needed to buy the median home in the United States. And so the bottom line is before the pandemic, it was the 40th percentile was the average household income needed to buy or the household income needed to buy a median home in the United States. You can just see it just leveled up post-pandemic. Interest rates, housing costs going up, everything.

31:54It's now 60th percentile. So the bottom line on this is that middle class, the middle of the economy, the 40th to 60th percentile of income has been priced out of the housing market. And I think that, yes, there are many other things going on. I know groceries. I know insurance. I know cars. And there's a lot of things going on. Yeah, medical. I mean, my medical costs, my medical insurance costs for my family of five went up to$66 ,000 a year this year. So I know there's more things going on than this. But yes, this is the one chart in my mind that explains why there's so much consternation in that bottom K and why the Fed is ultimately going to have to address it because you're starting to see political pressures rise up.

32:39I mean, this is where you get the election of Mamdami and the other lady in Seattle. You see so much anger out there, and it will manifest as political pressure. You see it from the Trump administration. I mean, Trump is putting political pressure on the Fed. He's going to stack the Fed with his own kind of yes-men. And so to me, these are the manifestations of what is a real phenomenon. So yes, some companies use it as an excuse, but I think it's real. I think the K-shape is real, and we should pay attention.

33:09Downtown Josh Brown:So you said in a K-shaped economy, policymakers will cater to the lower K. So that's that bottom, let's say, bottom 20 % or 30 % of the wealth distribution that are really struggling the most and vocally so. And you said that that translates to an easing bias, at least if policymakers are listening to that segment. Obviously, housing is the thing that's making people scream. It's unbelievable to not be able to afford to live in the country. If you have a job, your spouse has a job. There are families where both spouses have multiple jobs. and it's just like the thing that makes people say, I am going to vote for the most extreme candidate at this point because they're the only people that are listening to what I'm saying.

33:57Downtown Josh Brown:But then you're saying, because I want to translate this into a market outlook, then you're saying despite that easing bias, like ordinarily you would go to small caps and you would say, okay, if the Fed's going to have this easing bias, small caps should do well. And actually there are lots of charts floating around showing that small caps next year are expected to have higher earnings growth than large caps for the first time in a long time. But you don't seem to believe in that. You think it's a bad bet. So why won't the small caps work given the outsized earnings growth expectations and the easing bias Fed?

34:33Well, number one, I don't know that the Fed's easing bias and cutting rates is going to cure the problem that we have. Just because we have a problem and there's political pressure and the Fed has a hammer. Every problem looks like a nail. So they're going to use that hammer and the hammer is interest rate cuts. I don't think that, number one, when it comes to small caps and earnings, we had the same chart last year at this time. It's funny. We printed it last year. They were expected to grow earnings by 30 % this year and they ended up having flat earnings. So the estimates on small caps is sketchy to say the least.

35:09But yeah, I don't think that the key on small caps is you need to buy them at the right part of the cycle, early cycle. You get a washout. You have a recession or something. The Fed comes in and eases a lot, not in just drips and drabs of cuts through the year like they're doing right now. They need to have a washout where rates go down. And those stocks get hit too in that process. And then you buy them early cycle. So this is not that moment. We're not in that moment. No. And I think that This will be a broadening in my view, but the broadening, you want to buy, like we were just talking about the AI trade, to validate and ratify all the CapEx, you need to start seeing companies utilize AI.

35:47So you bring up like Walmart and things like that, like that next sliver of companies, still big cap, high quality companies, they're most likely to first adopt AI and show benefits of AI. Talk about holding headcount steady and things like that. This is going to be a while before that filters into the small cap universe, in my opinion.

36:04Downtown Josh Brown:Where it shows up in the form of increased earnings, like making these companies more profitable. I don't know that the Fed only has a hammer and everything looks like a nail right at this moment because Besant seems really creative. He's a treasury. But I'm sure there are conversations like, why is the housing market making people so angry? What's the solution? And so now you're hearing them float ideas like a 50-year mortgage, which just sounds like being a lifelong renter, but fine. It's an idea. I don't think it's a good one. But the next thing you heard was Trump wants to explore portable mortgages.

36:44Downtown Josh Brown:So this would be the thing that would answer the problem of people holding onto their houses too long. There's not enough liquidity in the housing market because nobody wants to sell a house with a 3 % mortgage, buy a new house with a 6 % mortgage. Do you view any of this as being constructive or these things are not going to be a big deal? Maybe they'll help a little at the margin or maybe they won't do anything at all. I actually think that the 50-year mortgage, if you gave me the option, I might take the 50-year mortgage. You can always prepay and then turn your – you can basically – if you get your – as your life circumstances change, you can prepay your principal and actually reduce the term of the mortgage that way on your own terms.

37:26But it's not going to change this. Ultimately, that's at the edges, like you said. The portable mortgage is the same thing. It will help at the edges. But the problem is there's a medicine that, in my opinion, needs to be taken, which is we need to have a modestly contracted deficit. We've been running a wartime recessionary deficits during this expansion. It is real money being put into the economy and printed every year, 7 % to 8 % of the GDP. The tariffs, I don't think you can criticize a lot about the tariffs, but they were bringing in revenue and they were set to contract the deficit down to about 6%.

38:07Now we're talking about, and the economy is slowing a bit because of that. That's a contraction. That will be medicine that you have to take. If you take the deficit down from 7 % to 6 % or 5.5%, the economy will slow. It will feel like a slight contraction because that fiscal impulse is coming down. But you have to do that in order to lower these interest rates on a more structural level to give the bond market confidence to let the rates come down and allow borrowing costs to be more normal. But now you're seeing like just this week, Josh Hawley and Trump saying, no, we're going to take those tariff that tariff money and spend it out as a as a two thousand dollar check to working class households.

38:49It's like we can't take the medicine as a as a the government and policymakers in the political cycle won't allow us to take the medicine. That's you know, that would just make things worse.

39:00Downtown Josh Brown:And so that's where I want to send checks out, put them in an envelope with Donald Trump's face. on it. And the problem is you might as well just deposit that right at Robinhood. Just let people know, all right, your stimulus is ready. It's in your brokerage account. Go for it. Yeah. So the deficit goes to 8 % of GDP. And we go through another one of these things where you get a sugar rush in the economy. How did that feel coming out of COVID? Did that solve all the problems? No, I don't think it did. Right. It was needed at the time. And like most things that went too far and it went on for too long.

39:38And we know what, and I'm not a deficit, like anti, I don't think you need to close the deficit to zero. I'm not sitting here saying that the deficits are inherently bad. It's a policy choice. A deficit is a policy choice. When you run a, a big deficit, it's a policy choice. There are trade-offs, you know, and I think at this point, the trade-offs have swung in the direction of, we should be addressing it somewhat. We should be trying to have some, um, a little bit, a little bit of austerity. I'm not saying go crazy a little

40:04Michael Batnick:Yeah, that's not politically palatable for this administration or really any. Like, who's going to want to do that? But let's just say that that would happen, that we work to take our medicine and the deficit would shrink. The economy would contract a little bit. Interest rates would come down naturally. That still doesn't fix one of the big problems of how do you come up with a down payment, unless you're also suggesting that in that scenario, housing prices would come down meaningfully as well. Yeah, no, you need a supply side solution as well. Like there needs to be a realization that we haven't built enough housing.

40:39We need to, at the local level, I don't know how you, from the federal, some of the things the federal government can do and some they can't do, but there needs to be a realization of like there's too much nimbyism. There needs to be more yimbyism when it comes to housing. Like, yes, there's fiscal and there's macro and those conditions need to be adjusted, like I said. But when it comes to housing, like before I was in this business, I was a land use attorney. So I was doing approvals for real estate developers, for phosphate miners, things like that. And it's like the process has really gotten difficult to approve housing in this country.

41:11And I think there are too many people trying to get their pound of flesh out of it. And so we need something that opens up supply. I mean, that's not it's above my pay. Well, there's a lot more.

41:21Downtown Josh Brown:There's a lot of other there are a lot of other societal things like people don't necessarily want to move to where the housing is. because now you have cities with apartment gluts. Like Michael and I are in Austin right now. I think most real estate people would say, okay, we might've went overboard with, but the jobs in Austin aren't necessarily the jobs that the people who are struggling to get housing can even get. So it doesn't matter if there's an apartment glut here or in Nashville or in Charlotte. So that's one of the issues and that's a forever issue. I wanted to pivot to this. It's November 20th.

41:57Downtown Josh Brown:So, of course, this morning we got September jobs numbers. I don't know if anyone still cares about this number, but I wanted to get your take on it. The U.S. added 119 ,000 jobs in September, which was a stronger than expected number. Although digging in, the gains were concentrated in health care, food and drinking establishments. That checks with my experience recently, what I've seen. and social assistance. Manufacturing sector somehow shed 6 ,000 jobs. 6 ,000 jobs is not that important one way or the other, but just notable. We think we're in this CapEx boom, and it's not necessarily translating into the areas of the labor market that you would have thought.

42:43Downtown Josh Brown:Transportation and warehousing saw 25 ,000 job losses. So that's the September number. Or are we moving past where this stuff even really matters that much? I think in the very near term, we are. It's getting stale. But it's confirming some of the alt data that we saw during the government shutdown. So the alt data is saying the labor market is weakening. I think that's – and that goes back to the whole – there has been some contraction brought on by the tariffs. Tariffs are a tax. That's what they are. It's ultimately a tax. And those revenues are coming in. So we increase taxes via tariffs and you're seeing that contraction and it's playing out in the labor market.

43:27If we were to stay on this course, if the Supreme Court doesn't overrule the tariffs, we don't send out these rebate checks. I think we're on this glide path to higher unemployment. The unemployment rate did tick up this morning to 4.4 percent. That's what you would expect. We look at things like when we haven't had this data, we look at challenger net hiring. So this is announced intentions to and you can see this on chart 11. You see announced intentions to hire versus announced intentions for layoffs. We're at in 2025 this year, we're negative. We're deeply negative.

43:58Downtown Josh Brown:What is this red line that doesn't look like a good line? Yeah, that's this year, year to date through October. And it's netting out the difference between a challenger private sector announcements for hires or not just private sector, it's the entire economy. Hires and layoffs. And so, yes, there was announcements or actual intentions. They're doing it. They measure intentions in the survey. And so this is the most negative we've been since 2009. This doesn't include 2009, but in recent years, definitely the weakest. But since 2009, we haven't been this negative. We've only been negative 2011, 2009.

44:37Every other year is positive. You have more hiring than layoffs. That's what that's the story. Then you have if you go to the next chart conference board, which is just it's a consumer survey. and they ask, are jobs more plentiful or more hard to get? And we're comparing this to the unemployment rate because it's one of those things where, hey, we didn't have the data. What can we see to track where this data is heading? The blue line is the unemployment rate. The purple line, you can't really tell so well from this chart, but it's shifted forward because we had more data here, is the difference between people saying jobs are plentiful and jobs are hard to get, and we invert that.

45:12So when it's going up to track the unemployment rate, It's basically saying jobs are harder to find versus plentiful. And that's been increasing. So we're seeing these things, what I would call alt data, confirm the weakening in the labor market. So this goes back to like when you say, how are you going to take this K-shaped framing and turn it into some kind of market thoughts? I think that the Fed is going to have to address the labor market. That's a part of the lower K. They're going to try to address the housing market. That's the best representation of the lower K. So what that means, though, is that all these other things that happened like so there's a group out there that wants the Fed to get really tight and induce a recession to crash the stock market, bring down the upper K.

45:55There's like a, you know, just this desire to bring down the upper K. That's unrealistic. That's not going to happen because if they do that, they sacrifice everyone in the lower K who's already in pain. What they're going to do is respond to the lower K and allow that upper K to continue to rise. And so in our world, how do you translate our world? You translate that to the bull market continues. The Fed is supporting it. The Fed has our back. And so to me, that's where you take this kind of big picture frame and bring it into the market. The Fed is not going to try to teach the upper K a lesson here.

46:30There is no real like they can't stop the AI train. They can't stop what's coming. It's coming. The die is cast. They can only kind of add a little bit of an accelerant on it with rate cuts, which is what they're going to do because they have to address. what's happening in the lower K.

46:43Downtown Josh Brown:Let's do the sentiment correcting, but you're still expecting a year-end rally. So this is what we've been waiting for. Like we said, we came through the summer. Everyone has said, hey, seasonally, you expect a sell-off here at some point in the summer. And we didn't get it. Sentiment was sky high. This goes back to that whole AI, the first AI discussion is like, what was going on? Was there anything real fundamental happening that was causing this recent AI pain, I'd say, no, you just get too many people on one side of the boat and that you need to correct that sentiment. That's the process of bull markets.

47:18So our model, this is just basically, we take things like positioning, we take leveraged ETFs, we take the polls that everyone looks at, and we spit out what's our sentiment reading. We've been above 70, which is extremely optimistic sentiment for a pretty long time, you can see. And we've finally started to break down. And this morning, we're down to 44.8. 40 is like excessive pessimism. You would love to see that as a setup. You can see the trading stats on the bottom part here. But the bottom line is we're getting this right at the time when seasonals converge to the most positive part of the year.

47:56The other chart that we have in here that we can look at is buybacks seasonally come back in December. That's been, yeah, here we go. So this is the seasonal pattern of buybacks. And it's been a huge, it's been a huge factor this year. Like you can see back in May when we had April, May, when we had the initial Liberation Day sell off, corporates were up to as much as 8 % of daily trading volume, which is insane. So they were in there with retail setting the bottom. That's been a huge factor. You can see the purple line. That's this year, the blue line, that's the average. Going back to 2014, 2014 and 2024, you can see we've surpassed it.

48:32So So corporates have been a big part of this market in a flow. So the bottom line is we have sentiment that was excessively optimistic, has now gotten close to pessimism. And seasonally, we know the calendar is favorable, but the flows are favorable because corporations are coming back and start doing their buying.

48:50Downtown Josh Brown:So they had to go through earnings. So during earnings, they're not engaging in buyback activity. And then now that they're in the clear, we've gotten all the earnings. These companies have buyback authorizations. And if you just mentioned how many stocks in the S &P are in 20 % drawdowns, let's go. Have at it. This is your opportunity. So I like that set up going into year end also. I think it's a good place to be. The one thing I would say is everyone looks, we've studied these periods where you have this very narrow market going into this part of the year. And like you said, people want to buy the laggards, but usually the leaders.

49:33It's the leaders that end up getting the flows coming into year end because people want a window dress and they want to buy. They want to own the stuff that's been working and they sell for tax loss and things like that. They're selling out of the laggards. So when you study it historically, more than likely, as much as it's unsatisfying for the average market participant, we think that the leadership will stay where it's been.

49:56Michael Batnick:come in so warn it that's that's a really good point about taking advantage of taxes harvesting which wealthy people are increasingly doing there's one notable group of laggards in the market which is the software names particularly the mega caps i'm talking about salesforce and adobe and a little bit lower down down the market cap spectrum uh atlasian these particular stocks are like on life support they are right at multi-year support like on death's door do you think that there is a catch-up trade in that group to year end? Or are these names really, truly effed? Because I don't have any domain-specific knowledge, I would go by my framework, which is that my default hypothesis is that the laggers, the deep laggers like that are going to get sold here at the end of the year.

50:46Especially with the setup where you had this nice little pullback in names like NVIDIA and some of the other hyperscalers who are still positive year-to-date and some of the hardware names that were positive year-to-date, but just had a nice bulldeck, I wouldn't bet on software catching up. I would bet on this divergence growing.

51:00Michael Batnick:All right. So this, Josh, JC would love this. Like these things are going to get crushed into year-end, have a false breakdown, and you buy the snot out of them in January.

51:08Downtown Josh Brown:Like what? The 20, like the bottom quintile?

51:13Michael Batnick:Like CRM, Adobe, Team. Like those names that are sitting on false breakdown watch, like they might have a breakdown into year-end. As people say, get rid of that. Like just take losses and then have just some sort of rubber band on the other side of the year.

51:26Downtown Josh Brown:I don't know. So I don't know if this is always true and I just don't realize it. But this year, it feels like the laggards, that list, it's just littered with like really big name, big brand companies. And it's expanding. Right. Right, but it's like Nike and Chipotle and Salesforce and Adobe, Starbucks. Maybe it's on that list. It feels like there are some large market cap. Target, there's so many. Very widely owned. Target, great example. It's just kind of weird to have like a regular bull market year, which we had with one pretty big correction in the middle, right? in April. But it's like a standard bull market year for the S &P, but so many names are left out of it.

52:22Michael Batnick:Warren, we had a chart earlier from you talking about like, there's more names that are down 20 % that are beating the index or something like that. We looked at this recently. I can't remember if we charted it or not, but the number of stocks that are down 30 % with the S &P within 5 % of an all-time high is very unusual. There's a lot of really funky things happening under the surface. That's what I'm noticing. As a setup, I love that. I love there. I think there's opportunity, not for the first time, that's ridiculous, but like there is substantial opportunity, I think, with a lot of these names that have just been completely discarded.

52:55Michael Batnick:It sounds like you don't agree, but that's where I'm at. Well, no, I mean, I'm talking very short term tactical towards the end of the year. I mean, but I think that in order to get this, like I said, in order to ratify the AI bull market, at some point, you are going to need to have that, this, this broadening. That's a more serious broadening than what we've seen through the last three years, let's call it. And that's going to be the AI's adopted and shows up in the results. And it only has to be a handful of these companies because as soon as like a handful of the companies come out and say, we've adopted it, headcount's done X or whatever it is that they're, however, that's going to express itself or margins have expanded by 25, 50 basis points because of this, you're going to get the market, there's going to be a massive search that takes place to find the next.

53:40And that's going to spread out underneath the next layer underneath the AI winners of the last three years.

53:47Downtown Josh Brown:Yeah, I think you will get that. So I agree with you, and I think it'll happen. Yeah, it's probably a story for next year, but not at the end of this year.

53:57Michael Batnick:Warren, you have a chart that shows the S &P 500 net profit margin with analyst expectations. I'd be curious to know how right the analysts are. Like if you look backwards, how much does this do actual deviate from expected? But to the actual point, if we see margin expansion in the 493, like that is one of the biggest questions. Do ultimately we see results from AI? And if we do and margins go up, then the market is going higher, like period. Exactly. So first question, do these analyst estimates come true? The bottom line answer to that is if you because we've studied that no recession, then they're very accurate.

54:41Recession, they're not so accurate. You know, they're not good at bottoms. Right. So that's why we do macro. If you're going to do macro, that's why you have to answer the question first. Is the Fed tightening? No. Is there going to be a recession? No. And everything else is kind of all clear from there. So they are pretty accurate given the fact that we don't have a recession on our radar. So what we have baked in through 2027 is 250 basis points of margin expansion to an all-time high. And to me, and this goes back one year ago, maybe more than one year ago, Fernando and I were with you guys in New York.

55:14And we presented that research where we said, look, S &P 500 is going to go to 7 ,000 by some point in 2026 and still not be overvalued because of, and we went through this whole, the way the market has changed, the way the composition of the market has changed. and how that new composition interacts with margins. So as margins expand with non-cyclical, less cyclical businesses like the mature tech stocks that are in there right now, multiples go up. And we did a whole bunch of work on that. And that's a phenomenon you see consistently through markets. So that's what the chart you're referencing is that when you get margin expansion, it's very rare to see multiples contract in those calendar years.

55:55So I don't think if this number comes through, if we get 250 basis points of margin expansion, this valuation concern is a great concern to fade. That's not going to that's there. Let's put that last.

56:07Downtown Josh Brown:Let's put that last chart up. So this is price to sales versus change in margin. And what you're showing is that I'm sorry, the next one. I don't. Yeah. So what you're showing is like if these if these companies can continue to grow margins, then you're not going to have to worry about valuations like price, like price sales standing in as a proxy for margins contracting or expanding. It's very rare to have that margin growth. And people say, I want to pay less for these stocks, not more. Correct. 2007, 2005 or two years where we saw that, that was a highly cyclical market composition. That was energy.

56:46That was financials. It's a different interaction when those are your market. That's where your market mass is. Then you had 2000 and 2018. Those were Fed tightening years. That's not happening either. So like those are the things you have to think about. But the bottom line, and we have much more detailed studies than this, but it's a good perspective. The bottom line is if margins do what the analysts think they're going to do, the market is not expensive.

57:12Downtown Josh Brown:And they are. And they are. Like Walmart is up as we're recording 6 % on the day. They beat earnings. They waste guidance. They waste on the earning side. They're doing things more profitably. You're going to tell me Walmart's not battling with tariff issues? They sell everything under the sun to everyone, but they're finding ways to do it. And that's the thing that continues to serve as this underlying trend of upside surprise. The best companies, the Walmarts, they just continue to battle and find margin. And investors continue to reward these stocks with higher multiples. It's not forever, but it's definitely right now.

57:58100%. And they're holding headcount constant for five years, for the next five years, is what they're saying, is what my understanding is. You know what else is funny?

58:05Downtown Josh Brown:They said they want to be on the NASDAQ. Did you hear that? I did hear that. The NYSE to NASDAQ shift. Yes. Yes. I don't know. Very interesting. I don't think that's a cost-saving measure because from what I'm told, it's about equal which exchange you're going to list on. I don't think they compete on the cost of listing. so I wonder if that's just like hey we're cool like we're we do technology too we do AI robots are coming in Walmart yeah for sure yeah all right dude that's a great place to leave it we we uh we love having you on Warren and I know our audience appreciates the 30 ,000 foot view and then translating that into a market posture and I think you do it better than anyone we know So thank you so much.

58:49Downtown Josh Brown:What are you looking forward to? What's next for you? Anything on the anything on the radar? Yeah, man. The thing I'm looking forward to is we just we've had an internal AI agent that builds charts for you on the fly. And that's been it's been the thing that's leveled up our efficiency. And we are in 2026. We're going to start allowing some outsiders to have access. And so we put some demos out on social media. I'd say check it out. We're very excited for that. I think it's going to be it's you'll just have to see the demos. I could go on and on, but watch demos. You'll be impressed. Are you telling Michael and I that 314 research has gone agentic?

59:24Downtown Josh Brown:We've been agentic. I mean, that's why we don't have our headcount has been constant, Josh. That's what I'm talking about. You know, this is why we're believers. So Warren helping to cause more of that K-shaped economy. And we appreciate it. All right, guys, thank you so much for listening. I want to send you to Warren's site and make sure you check it out. what's the best, what's the URL for people to go to if they want to learn more about you and Fernando? The number three, then spell out 14research.com. And if you're interested, fill out the form and we'll get back to you. All right. Check out Warren and Fernando's stuff.

59:58Downtown Josh Brown:They're always great. Guys, thank you so much for watching. Thank you for listening. We appreciate you. We wish you a great weekend and the compound shall return. See you soon.

1:00:29We'll see you next time.

1:00:43Downtown Josh Brown:We'll be right back.