The Number One Question Facing Investors, How the US Became Recession Proof, Why Tech Stocks Might Underperform Going Forward With Datatrek’s Nick Colas and Jessica Rabe

17:05Nick Colas:It's helped a lot of people, but it doesn't make them more predictable in all ways. And so it's not like, oh, this time is different means that we're just flying into a bunch of denial. What it means is that it's different, but it's not more predictable.

17:19Jessica Rabe:Okay. Is the right way to sum that idea up that we are recession resistant, not recession proof. So you can go swimming with a water resistant watch. You shouldn't go scuba diving. And at a certain point, there will be an exogenous shock that does tip us all the way over. That's the unpredictability. But like almost by definition, it'll be an unknown unknown. And it's probably not going to be the type of thing that we used to say is consistent with sort of like a plain vanilla recession from the past, which we seem sort of impervious to. Yes.

18:01Nick Colas:Is that fair? That is fair. And I think the market also thinks that policymakers will step in extremely quickly if there is a shock, as they did in 2020. Monetary policy, fiscal policy, there is a very strong policy put, a proven policy put. And the U.S. policymakers have a very long track record, an increasing track record of doing it very aggressively and very quickly.

18:23Jessica Rabe:Well, yeah, we had a rehearsal and we had like a fire drill in 2023. They just changed the law. They didn't even vote on it. One day we had an FDIC limit of$250 ,000 for a deposit account. And then the next day it was unlimited and there was no discussion. We just policymakers came in and said, what's the problem? There are five banks where people have way too much money deposited and there are a run on those banks. OK, here's the solution. All of those banks are fine. All of those depositors are fine. And there is no FDIC limit. It may be a stated limit, but we're going to put those banks through a process and they'll be insolvent.

19:10Jessica Rabe:But the depositors will not be. And that just became what it is. And, you know, it's not the Fed or not just the Fed. That's basically the FDIC. And so every agency is thinking this way. And so there are solutions to problems that we never before thought could just spring up, but then they do. Yep. Exactly right. Okay. All right. Very, very helpful. Jessica, what's your take on this idea?

19:41Josh Brown:For my next section? Well, just generally speaking, if you think we should move, let's move. Sure. Yeah, let's launch into the next section, just looking at time here. Okay, so last time we were on, on June 8th, we showed that tech had just outperformed the S &P 500 over a 50-day window to a statistically extreme degree. And we flagged that as a warning sign for the audience. And that was right. Good call. Thanks. Since then, tech has underperformed S &P by 1.3 percentage points since we were on. So say we thought we'd update that chart and then talk about what we expect for the AI trade in the back half of this year.

20:26Josh Brown:So just starting with that updated chart, which shows rolling 50-day price returns between the S &P 500 tech sector using the XLK ETF as our proxy and the S &P from 2015 to the present. When the blue line's above the x-axis, techs outperform the S &P by the point shown on the y-axis. So getting straight into it, you can see on the right of the chart that tech beat the S &P by 29 percentage points over the prior 50 trading days on June 2nd, which was over a six standard deviation event and the most extreme reading in this data set by a wide margin. And since then, the tech sector is down 6.3 % versus a loss of 60 basis points for the S &P, lagging by a total of 5.6 points, again, since it got to that extreme on June 2nd.

21:13Josh Brown:But we also think it's constructive to look at tech's 100-day returns versus the S &P. We also have that chart all the way back to 1999. So that's about four and a half calendar months. So it's long enough to smooth out daily noise and consider structural returns across several market cycles. So you'll see also on the right side of this chart that tech outperformed the S &P by 25 points over the prior 100 trading days, again, on June 2nd. And that was over three standard deviations above the 27-year average of 1.2 points. And it's only happened 0.7 % of the time over this timeframe. So it's very rare.

21:58Josh Brown:And we can look at the last two readings we saw to kind of help frame what could happen next. So the first was 41 instances from December 1999 through April 2000. tech's average outperformance reached 30.9 points. And every single time, the following 100 days saw tech underperform and by an average of 10.8 points. And then the second was during May and June 2023, a much smaller sample at just three instances. And the pullback was mild under one point, but that's because it was right off the 2022 bear market lows. And just as excitement around AI was taking hold with the launch of ChatGPT. So overall, we think the lesson here is that what actually broke the back of tech in 2000 wasn't valuation.

22:49Josh Brown:It was the Fed. So we had sequential hikes in February, March of that year, then another 50 basis point hike in May. And that pushed policy rates to new cycle highs. And today, of course, new Fed Chair Warsh has struck a notably hawkish tone, and 2022 already showed us how brutally a hiking cycle can reprice high multiple growth names. Of course, we do have a solid labor market that remains the offsetting factor to that, but we obviously need to flag it as a key risk here. So overall, we do remain long-term bulls on U.S. large cap tech. But at these statistical extremes like we flagged last month, believing in further strong near-term gains, we think is betting against us 27 years of history.

23:36Josh Brown:So the way we frame it is 100 trading days from June 2nd when tech hit those extremes takes us through about late October. So we think it is reasonable to expect tech's relative return to pull back closer to its longer run average of 1.2 points over this period. And that may feel like a tech bear market, but we do think it is a healthy pause in a longer secular story.

24:04Jessica Rabe:And it's relative.

24:06Josh Brown:Yeah. It's relative. Good point.

24:07Jessica Rabe:You could get into a market environment where healthcare and financials, which are two pretty big sectors, obviously not as big as tech, but all of a sudden people just have a preference for those stocks for six months. Doesn't mean tech has to fall 20%, but you could just see relative underperformance and it would satisfy the mean reversion that that chart that you showed implies.

24:34Josh Brown:That's an excellent point. Yes, it's on a relative basis. You're very good at this. Really? You are. And that actually leads into my next point very well. So in the meantime, yeah, we agree. We think there will be rotation within also tech from a mechanical more so than a fundamental perspective. So if you just throw back up that graphic, thank you. So to set up this discussion, this graphic compares the MAG-8 and the S &P 500's top five semi-stocks by their weightings. sell-side analysts' 90-day earnings estimate revisions, expected earnings growth valuations, and year-to-date returns. So just go through it pretty quickly here.

25:16Josh Brown:Over the past 90 days, the MAG-8's current and next year EPS estimates increased by an average of 7.5 % and 4.8%. But for the top five semi-names, they're up an average of 36.5 % and 33%. So that's nearly five and seven times more. And this was not just one or two names carrying the groups. All five of the largest semis saw double-digit upward revisions to next-year estimates. And that momentum is also showing up in earnings growth expectations. The MAGATES implied EPS growth over the next year averages 23%. For semis, it averages 61%, so nearly triple. And then naturally, that's introduced a valuation premium for most of the semi names.

26:02Josh Brown:So excluding Tesla, the MAG-8 trade at 25.9 times forward earnings. Semi's average 52.5 times. And that's an almost 27-point premium over the MAG-8. It's a double. Yeah. It's a double. Yeah. And the stock prices already reflect all of this, too. So the five semi names are up an average of 168 % year-to-date. The MAG-8 is up just 4.5 % year-to-date. So our takeaway here is that earnings revisions have been the entire story this year, the single thing separating winners and losers inside tech. But after triple digit advances this year for all the S &P's top five semi names, the bar for them to keep outperforming is just far higher than it was six months ago.

26:50Josh Brown:So and some of these valuations like we just showed now sit well above the MAG-8. So we do think the logical call here is to expect the second half of 2026 to see tech's year-to-date laggards play some catch up. Once again, this is more mechanical than fundamental. But the more a handful of names run, the more concentrated any tech portfolio becomes in them. And the more likely that money needs to stay in tech, the more likely that money needs that money that, sorry, the more likely that the money that needs to stay in tech starts spreading into other names with lower valuations and decent fundamentals.

27:25Josh Brown:And we do think the MAG-8s collectively lower multiple combined with still solid expected earnings growth is the obvious place to go. The only question is whether valuation alone is enough of a catalyst to cause this rotation, or if investors first want to hear what the hyperscalers have to say on Q2 earnings calls.

27:47Jessica Rabe:All right. So the obvious question here then, and this gets back to the original question, we actually have seen less enthusiasm for the types of CapEx spending that was the dominant story in 2025, so far throughout 2026. The stock prices of the spenders are not reacting to the upside. And in many cases, like Meta and Oracle, we're starting to see some limitations being considered based on stock price alone. These companies are being told by Wall Street, we're not convinced that continuing at this pace is in our best interest and we're selling our shares. So now you have this separation. and I was talking with Michael Semblist from JP Morgan about this last week.

28:42Jessica Rabe:He was pointing out that in early 1999, the internet service provider stocks started going down, which was sort of a referendum on how confident investors were in the build-out of the original internet. But while that was taking place, the suppliers, the beneficiaries of the CapEx, those stocks kept going up. That's your Dell computers, your Cisco's, your Intel's. And the way he thinks about it is that was the early warning sign when the share prices of the spenders are no longer reacting positively. It's only a matter of time before the component suppliers realize that they've run off the cliff and they look down and they see nothing but a mile below their feet.

29:29Jessica Rabe:I think that is the thing most people are afraid of for the semi-stocks and the AI CapEx darlings. You guys probably have a view on that. It's a little bit outside the scope of what we're talking about today, but what do you think?

29:44Nick Colas:Can I just jump in for one second? Yeah, please. The 99 example is straight up my wheelhouse because I was trading at SAC, those stocks at the time. There's a missing piece to that analysis, and that is that it was the B2B companies that took over leadership. at the very end of that cycle. So the Commerce Ones of the world that had a whole different way of playing, you know, the internet and the value of the internet. So it was not immediately clear like, oh, well, the ISPs are rolling over, therefore the cycle's over and that's an early warning sign. No, it was investors looking at second and third and fourth order effects.

30:20Nick Colas:And I remember vividly like sitting with the guys at Commerce One, the guys at GM talking about what B2B was going to do for the entire industrial base. So it wasn't that the energy in any way diminished, honestly. It was the energy shifted. And as Jessica said, the real catalyst for that implosion, and we talked about this on the last show, the NAS was down 30 % over the course of a couple of weeks from the highs. The cause of that implosion was 110%, what Jessica said, it was the Fed. The Fed, right. The realization like, oh my God. The cost of capital. The cost of capital and the access to capital was going to go away very quickly.

30:58Nick Colas:And that was really the cause. So I take Sembo's point, but I would just say, having lived through it, it's only a piece of the story.

31:05Jessica Rabe:Okay. I think that's a really important distinction. And I was trading too, and I remember all those stocks, ITWO and CMRC. And I was in them. I had my head handed to me when the party stopped too, just like everyone else. But you're right. There was a new story that took over from the consumer internet. And all of a sudden, AOL was no longer a momentum name, but Commerce One was. And it was like a new phase for the internet bull market.

31:37Nick Colas:Yeah, that was a story for 2000, 2001, and 2002. That was supposed to be the next five-year cycle was enterprise adoption.

31:46Josh Brown:I think to your point, though, Josh, on semis, is it's like, what are the odds over the next 90 days we're going to have or over the past night, we're going to have another earnings revisions of plus 30 % over the past 90 days for semis? Like once again, that's a high bar. So I think some breathing room.

32:05Jessica Rabe:I have more conviction in the semi-capital equipment stocks just because there's such a huge concerted effort within the hyperscalers to build their own chips. And, of course, that's capital equipment business. It almost doesn't matter who's selling chips at that point for that group so long as someone is. Who's making chips, I should say. I understand, though, if the big five don't see the same vigor of upward revisions, those stocks will not be acting as well as they do today, regardless. Right. Okay.

32:44Josh Brown:I wanted, though, to just for my last section, I think this is a good time to just take a step back and look at the longer arc for tech, specifically what history says happens in year four of a run of consecutive annual gains like the one we're in right now, because we're now in year four. The Nasdaq just had three straight years of gains of 20 % or more. So 43 % in 2023, 29 % in 2024, and 20 % in 2025. And these came after a rough 2022, of course, when the comp fell 33%. So I just wanted to go into kind of what history says happens after a down year because it's pretty constructive. the Nasdaq's most common bull run lasts two years after down year, which has happened four times since 1972.

33:34Josh Brown:But three to six year runs combined are actually more common happening six out of 10 instances. And we're currently in this camp. So that's in keeping with history. But importantly, the Nasdaq has never stopped rallying at exactly four straight years since the early 70s. So if the comp is up this year, history says it should rally another one to two years. And then as for what year four actually looks like in these sequences, since that's the year we're currently in, we have a couple points here too. And yeah, thank you. That's perfect. The next graphic. Since 1972, the NASDAQ strung together three straight up years after a down year six times.

34:16Josh Brown:Four of those six times, year four was also a gain and two times it was a loss. So the odds are 67 % for a fourth year of gains. The average return across all six years is a modest 5.1%, but that's skewed lower by 2022's bear market. If you strip out the two losing years, the average year for a gain jumps to 16.8%, above the long-run average of 13.3%. But that also is itself skewed by 1998's blowout 40%, with the other three ranging from 6 % to 12%. So sorry, a lot of numbers there. But the takeaway here is that a below average gain in year four is actually the historical norm. And that's because it's really hard to surprise the market into another 20 % plus year for three straight years.

35:07Josh Brown:So the comp is up 13.1 % year to date. So it's running just below average. And I think it's worth noting that both losing years share the same root cause, and it's a reoccurring theme in this episode, a Fed rate shock. So 1994's 3 % pullback and 2022's 33 % decline both came from the Fed hiking rates. And the comp's current setup, three straight years of 20 % plus year gains after a down year, has only happened twice before. So the first was after 1994's 3 % decline. Then you had 1995, 1996, and 1997 all delivered 20 % plus years. 98, 99, of course, kept going of 40 and 68 % before the dot-com finally arrived in 2000.

35:59Josh Brown:The second was after 2018's 4 % decline. You had 2019, 2020, and 2021 all deliver 20 % plus years. Then 2022 brought the Fed-driven bear market. So again, so the takeaway here is that history says the Nasdaq should keep rallying beyond this year, barring, of course, that Fed rate shock. There will be more pullbacks like in any bull market, but we do continue to treat them as buying opportunities. We probably sound like a broken record, but we do think the 90s comparison is a useful reminder that it's a useful reminder of how much money was left on the table by investors who sold too early.

36:42Jessica Rabe:Yeah, a broken record, but continually playing the right song. and that's the name of the game of what we're all trying to do with our money is not be endlessly entertained by variety but to actually get things right and so far you guys have been incredibly prescient and you've kept us in this market and you've repeatedly told us the important things to watch for and I just want to tell you how much we and the audience appreciate it so thank you so much thank you so much

37:14Josh Brown:we love coming on All right.

37:16Jessica Rabe:So guys, once again, if you want to follow Nick and Jessica's own video channel on YouTube, there's a link in the show notes below. And we hope that you check out datatrackresearch.com and you can be on their subscription list as well, just like I am. Thank you so much, Nick and Jess. We appreciate it. We'll check in with you soon, hopefully at the end of the summer. In the meanwhile, enjoy. Thank you guys for watching. Thank you for listening. Have a great day.