Why the Knockout Punch Never Comes With Brian Levitt

12:28Downtown Josh Brown:All right. The right way to invest. Shout out to Oppenheimer. just just a blessed memory yeah just well you're oppenheimer but the other one's still here all right uh let's start with this the most crowded trade in the market michael take it away so um

12:43Michael Batnick:you know i just want to say people see me typing on my computer sometimes while josh is talking what is he doing is he texting he's no doing work he's in a mixed group on reddit so i was just looking at apropos really of nothing that we're about to speak to but one of your one of the suites of ETFs that I love to look at are the equated ones, not just RSP, but like all of the other ones. So I was taking a screenshot. I asked Claude how much money is in these funds total. And it says about seven and a half billion dollars. I don't know if that's higher or lower than I would have thought. Like the equal weight technology, the staples, because we look at RSPS all of the time, all of the time, because XLY is a hugely flawed product, I think.

13:20Yeah. And you want to get a sense, breadth of the market, right? You're following it. How is it performing relative to the market cap. I'm watching it all the time also.

13:27Michael Batnick:Yeah. So anyway, we're fans of that. Okay. So not that this is news to anybody, but this is so obviously the AI or nothing bull market. And I don't just mean the stocks and their prices. If you look at the actual earnings. So this is from Jim Paulson. Try it on, please, John. The S &P 500 new era sectors trailing 12-month EPS. And we could understand, you know, we all know what's in there. Versus the old sector trailing month EPS. And this goes back to 2022. So he said, many investors suggest the bull is doing fine because S &P 500 earnings continue to rise. While this is true, earnings for most companies are actually below where they were at the start of this bull market.

14:08Michael Batnick:So I would ask you, I think probably the interpretation is that this is bearish because it's only one area doing all of the heavy lifting. What if the red line, forget it, but catches up. But what if that gets a lift from all the AI productivity? Right. And I think it's starting to happen. If you actually look at the first quarter of this year, you had earnings across most sectors posting very strong gains. So it was seven of the 11 sectors posting double digit earnings growth, nine of 11 positive earnings growth, or maybe even 10 of 11 positive earnings growth. So it is broadening out. The interesting thing for the second year in a row, we really were at a point where we expected the markets to broaden out.

14:48and it was starting to work. Two years in a row, a policy decision disrupted it. So you've seen other parts of the market. You've seen small cap earnings start to pick up and the markets have responded. But yeah, I mean, it's an environment where the world is adjusting to a very substantial structural change that I think even goes beyond what investors had anticipated in the beginning of the year with regards to the AI build.

15:16Downtown Josh Brown:The S &P is up 11 % year to date-ish. The MAG7 are negative on the year as a group, if you equal weight them. Very strange. And then I read 40%. I didn't double check it. I showed up 40 % of S &P stocks were negative on the year. So to Michael's point, there's extreme concentration happening in this AI CapEx story. And it does touch a lot of sectors. Think about it. Like utilities are in there. Materials are in there. like industrials are in there. So it's not just tech, but it's one story. Like if you find, if you find a stock that's up 20 % on the year, if it's not a biotech that just got approval for something, it's probably AI related.

16:04Downtown Josh Brown:And I think that's the, when we say like the most crowded trade, well, why is everyone crowding in there? It's literally where the earnings growth is and it's where the revenue growth is and why wouldn't they want to own those stocks? So that's the story to me of the first half of this year. Do you take issue with any of that? I don't, although I would say there's really been two stories that have unfolded since the beginning of the year. You had the first one. And if we look at our leading economic indicators, the global economy moving into an expansion while the Federal Reserve is going to lower interest rates.

16:34So that's quite bullish. And that suggests broader market participation. If you think of the first few months of the year, we had a nice feel of that. You had a pretty decent environment going on. the war in Iran stopped it. March. Yeah, the beginning of March, similar to the way Liberation Day stopped it in 2025. So when I say two years in a row, we made a policy decision that disrupted it. What other parts of the market need? Like if you're going to be in a slow growth world, everyone's going to keep bidding up growth where they can find it. If you can get in an environment where you have fiscal stimulus, Fed cutting interest rates, global economy picking up, that's when more companies can participate.

17:15So we stalled it here, you know, for certainly parts of the S &P 500. But I wouldn't underestimate small caps doing well this year, emerging markets, of course, emerging markets. What do they need? What do small caps need? What do the rest of the markets need?

17:31Downtown Josh Brown:We're going to talk about some, you wrote about bear market narratives, and we're going to touch on that later. So I don't want to step on that. But what do we need to see in the second half, the resumption of what you just pointed out? We had this broadening trade two years in a row. Something weird happened in the spring out of nowhere. Stopped it dead in its tracks. Right. And we went back to an AI. It went to a slow growth. What do we need to reverse that so that we're not looking at 40 % of the market negative on the year? Like what has to happen? Oil prices peaking, which I believe they have.

18:03Interest rates peaking, which I believe they have. Inflation expectations peaking. And a Federal Reserve that can get back on its easing stance. So a lot of that has to do with the straight-up moves, what's going on with Iran, and can we get past that? So the good news from a market perspective is the market's moving on. If we think about each of those things peaking, but you need the real economy to get support from that. So the market is believing we're going to get to a better place when you think of oil, inflation expectations, rates coming down. But the broad macro backdrop is weak as a result, and the Fed's on hold as a result.

18:41Downtown Josh Brown:So there's two interesting things happening at once. I'd love to get both of you guys what you think. The oil price spike from the Iran war, it's like it really threw a monkey wrench into everything because it did two things. The first is obviously it screwed up the broadening trade. Correct. And it took like a whole chunk of the market down. And these were stocks that were starting, we were starting to see the 52-week high list expand. Yes. And that totally went into reverse. So it did do that. And then simultaneously, it raised inflation expectations. Even though oil is one input, it kind of brought like CPI back into the focus again.

19:23Downtown Josh Brown:Correct. It knocked the Fed rhetoric on its heels. And so like the whole housing component of the stock market and throw it out, like it's forget it. Financials, you're going to flatten the yield curve. Financials got kneecapped. Real estate, like real estate up until recently, there's some weird reasons why. Insurance, like all of these different categories of stocks, and there are huge categories of stocks, got blown up by this oil price spike. And so I feel like if that goes into reverse - If that goes into reverse, yeah. It would make sense to see people say, okay, great. It's game back on.

19:59Michael Batnick:Well, it's happening right now. Look at this chart. So this is Russell 2000 divided by the S &P 500. and this thing is - Looks like it's cooking. It looks like a major, major breakout is coming. Correct, and that's the peak in oil prices. That's the peak in inflation expectation. I mean, the reality is you get a CPI report a few days ago and investors worry because it's what, 4 % or so. I mean, where did we think it was? We knew that's where it was going. I've never been concerned about the headline number. I'm far more concerned about what the bond market is telling us about inflation. And coming into the year, you had a five-year break even probably around 215.

20:37I like that. I can sleep very well at night with a 215 break even. You move to 265 or so, that starts to get a little bit worrisome. We're back at 250. And so the bond market's telling you you have price stability, which means you're not going to get rate hikes.

20:55Downtown Josh Brown:But we don't have wage growth as a component of the inflation. No. That's not what's happening. not what's happening. You have a price shock. That was the problem we had four years ago. We don't have that today. No, we have the price shock. Right. Okay. Right. And if you think about when the problem became more critical five years ago or in 2022 was when the five-year break even broke above 5%. Yeah. That's, I mean, I'm sorry, 3%. That's the five-year goes above 3%. That's the problem. You have to start tightening interest rates. We know when you tighten interest rates, bankers tighten lending standards, credit spreads blow out.

21:29That's how end of cycles happen. And that's not what this is.

21:32Downtown Josh Brown:If we were to end the year today and somebody would say, use one word to describe what worked in the markets in 2026, what word would you use? AI. What would you use? Memory. Growth. Momentum. Ah.

21:49Michael Batnick:Yeah. Ah.

21:50Downtown Josh Brown:Yeah. Which brings us to chart two.

21:54Michael Batnick:It's synonymous. All of the momentum is AI, but go on. It's synonymous. Right. It's. Ah. It is. It is. It's all AI. So this is from, there's a guy called the Daily Chartbook. That's not his name, but he happens to write a research piece called the Daily Chartbook. And every day he puts out 30 or so great charts. And this is one of them. So we're looking at the momentum crowding score. I don't know how Barclays is exactly calculating this, but whatever. It's at the 90th percentile. And so on Friday, we got a very quick unwind of this. By the way, the unwind has now rewinded without that. Like DRAM, the ETF is up 12 % today.

22:30So chart kid, we have a chart kid.

22:34Michael Batnick:He's an artist. Chart three. He made a chart. I said, hey, you know what? I think this is a great way to visualize what just happened.

22:41Downtown Josh Brown:When he turns 13, he'll become a chart man.

22:43Michael Batnick:On Friday through Wednesday, the stocks, I said, take a look at the stocks that were the furthest distance above their 200-day moving average and plot that against what happened over the last four-day period. And it's a very clear story. The stocks that were the most extended, so on the Y axis, you see how far they are away from their 200-day moving average. So Micron was 150 % away from its 200-day moving average. Yeah. People were a little bit drunk and they needed to sober up and they got a little bit of a slap on the wrist. So I thought that the sell-off last week was long overdue, very much needed.

23:16Michael Batnick:I don't think that I, I mean, I definitely didn't think that we would bounce in two days. I thought it would maybe last a week, two weeks, but we needed it.

23:22Downtown Josh Brown:May I? Yeah, go ahead. Cook. Okay. Not everything is AI. This is Casey's General Store, which is an outlier because it had an amazing earnings report. No AI, literally selling pizza in gas stations in the Midwest. Okay. So not everything. But no, no, no. But that is the exception. Like you said, look at all of the bubbles.

23:45Michael Batnick:Those have one thing in common.

23:48Downtown Josh Brown:WDC, Dell, Intel, STX, AMD, SanDisk. Let's make an important point to investors. I mean, investors are always asking me when I think volatility is coming or when I think a drawdown is coming. Yeah, can you give us a heads up on that too? Well, it's almost, Josh, isn't it always the result of policy uncertainty? I mean, isn't that when it always comes back in? So you, what happened on Friday? I mean, I guess we're going to, you know, we don't have a deal with Iran. All right. So there's some policy uncertainty there, but we've been doing that for weeks now. But we got 175 ,000 non-farm payroll number, which, by the way, gets revised 57 ,000 in either direction.

24:23So the last thing I want to do is freak out about a payroll number. But all of a sudden, the market wants to raise expectations of one or two Fed rate hikes. So you start to get some of that uncertainty into the market and you get a sell-off. I mean, it's not the earnings side. We talked about that, right? Earnings have been great. So you adjust the discount rate. At some point, you're going to have some volatility in these markets. But I'm still in the camp, and I've said it already. I just – I don't believe that we're in a persistent inflation environment, and I don't believe the Fed's raising interest rates.

24:55Downtown Josh Brown:I think what you raise is such an important point because if – not that we get a choice, but if you were to get a choice, what is going to be the source of the market volatility? Door A, NVIDIA just pre-announced the downside. side okay and the other door b is donald trump versus iran goes in a weird direction like you would take door b every single time correct nobody wants door a and the good news is we don't have door a right now we don't or if there's a door c i would think it would be some hint of stagflation which i i always think is silly um this is not stagflation this isn't stag or flation you know sounds like Linda Richmond on Saturday Night Live, right?

25:40Downtown Josh Brown:Discuss, discuss, talk amongst yourselves. But yeah, it's not stag or inflation, but that's, I mean, I probably talk about inflation break evens too much right now, but every cycle there's something new I'm laser focused on, right? We all are, you know, wait, interbank lending spreads, 2020 vaccination rates. To me, that's the story right now with oil where it is. As long as we have price stability, this cycle is going to keep on going. Are investors taking too much risk? no i don't think investors are taking too much as a group i know it's hard to lump everybody you don't think so no and and i which investors is the question yeah i mean all right let's start i don't think professionals are taking too much risk right now i don't let's start with let's start with that yeah i don't think so and i think individual investors are still very concerned about this i hear you know at least anecdotally or if you look at the bulls minus bears indices I mean, you have people who, you know, get quite bearish very quickly when these types of events come around.

26:37So I don't think we're overexposed to equities. Actually, if you break down U.S. households, equities, fixed cash, you're pretty much in line with, you know, you're pretty reasonable in terms of what percentage you have in each.

26:50Downtown Josh Brown:Let's do the margin debt chart. So this is friend of the show, Liz Thomas, huge fan of Liz's. I don't agree with the conclusion though, that she's said, I remain bullish, but not with my head buried in the sand. Margin debt looks high at the moment. Investors don't seem afraid of heights. She's showing, she's doing it right. She's not showing it at least. She's not doing the dollar amount of margin debt, which drives me crazy. She's doing it right. A percentage of money supply M2. I would just say like, of course, margin debt would be at a high with the market at it. It always is. Correct.

27:24Michael Batnick:Wait a minute. Hold on. There's two things here because she did adjust, right? But she's adjusting by the wrong thing. Okay. So, but here's, here's, I think there's another thing that's driving this that people don't talk about. We do. It's rich people using margin debt to borrow. Like, so there's so much of that. There's so much of advisors driving that where it's not the indicator that it used to be. It's not people taking excess risk. It's people borrowing against highly appreciated portfolios to put it to work back into the real economy. Right. I agree with that completely. And when people look at charts like these, they have to recognize that basically what you're signaling here is not a timing tool, right?

28:01You're suggesting that if this unravels at some point, there could be some vulnerabilities here. But you certainly shouldn't use this as a timing tool because to your point, you should expect it to be higher given where the markets are. pulls back 10 % and stays down, no V, just 10 % pullback and then three months in a drawdown,

28:21Downtown Josh Brown:that margin balance comes down. Correct. Naturally. Correct. It's not a nuclear bomb going off. It's not a nuclear. People just get less bullish and stop taking as much risk. That's the challenge. I think that when I speak to investors, I get the sense that people think something terrible is lurking. And the reality is they've been thinking something's terrible been lurking forever. Yeah. Right? And so, you know, try and I always try to make sure that they're putting events into the proper context, right? If you, you know, the war in Iran starts, I mean, that's going to be the big moment. People are afraid.

28:53If you look at almost every time you have one of these geopolitical risks, market's positive 12 months later. Almost every time you have a 20 % spike in oil prices, the market's higher 12 months later. And so, you know, investors, I think there's just too much of a news flow. There's just so many concerns and so many scare pieces out there where if they took a step back and they said earnings are good, credit spreads are tight, inflation expectations are contained, the dollar hasn't rallied to, you know, unnecessary levels. There's not a lot in here that would suggest we're in a danger zone.

29:27Downtown Josh Brown:So you're doing this as long as I am. You and I are roughly the same age. Yeah. I'm a little bit smarter than you. And I'm a little bit older than you. Fair. No, no, no. But like you and I know this, but the average investor doesn't, and it's not their fault. I think you and I are now older than the average investor. Close. Yeah. Ish. Ish. The average investor is looking for a knockout punch. Correct. In the headlines. They think a news event is going to happen and it's going to punch the market in the face. Don't knock it over. And knock us into a bear market. Yeah, you're right. What they don't understand is that knockout punch comes at the bottom.

30:05Downtown Josh Brown:so a great example is lehman brothers we're already in it we're already in a 25 or 30 percent drawdown right by the time lehman goes under they went under because of the bear market right they didn't go under and then um and then that necessitates us having a bear market right right okay so that but they think like such and such thing terrible thing is going to happen which is then going to put us in a bear market, but the reality is we are much more susceptible to a real knockout punch once we're already in a bear market. And that happens. The knockout punch comes as a consequence of the terrible environment that we have already found ourselves in for quite some time.

30:53Downtown Josh Brown:Correct. And they don't, but they don't, they don't understand it. They think it's like, they almost think it's like Looney Tunes where like a f***ing anvil, like somebody drops a piano on Wile E. Coyote. Right. And then a lump grows out of his head. They think it's like this cause and effect. It's not cause and effect. It's what environment are you in? The environment we're in right now, why would you be looking for a knockout punch? There's no debt problems, no credit issues. There's not private credit issues. There's lack of investor interest in private credit. That is not 2008. It's just human nature.

31:29Downtown Josh Brown:No, that I totally get. Because we've been wired that way to look for signs that there's danger.

31:35Michael Batnick:Protect the nest. I mean, like DRAM is, I'm looking, it's on my screen. It's up 13 % right now. But to finish my point,

31:42Downtown Josh Brown:we're 18 years since the last actual recession. I'm throwing COVID out. Yeah, throw COVID out. Okay. We're 18 years from the last recession. So for 18 years, people are looking for this knockout punch that's going to put us in a bear market and recession. What have you spent that time not doing that? Right. Like, you know, imagine. And you and I, we had to respond, all of us, we had to respond to the European debt crisis. We had to respond to Brexit. Every single thing that happened along the way, we had to make sure that we were holding hands and guiding people through these environments. You even saw it last week.

32:16I'm reading through my social feed and people are talking about, oh, the 30 or above 5%. This is the US debt problem that we've been worrying about. That's the trigger. That's it. Yeah. we're going to collapse on our debt or, oh, inflation's here and valuations have to adjust meaningfully. And it's just not, it's just not a reality. You're, you're, you're not grounded.

32:38Downtown Josh Brown:The cadence will be this, the top will look like this. There'll be great news and stocks won't react well to it. And then we'll all shake it off and we'll put out all these tweets about, here's some context. And then the market will rally back to a high, but not the old high. And we won't think much of it. It's just the ebb and flow of markets. And then like six months will go by since we've had a new high. And people will start getting a little bit less enthusiastic because I don't understand. I keep putting money in, but it's not going up. Right. And then, so that is sort of how it happens. And then if that goes on long enough, we're in a 10 % drawdown, which then becomes 12 or 10.

33:20Downtown Josh Brown:And then you start to see the city economic surprise index roll over and all the surprises start coming in worse. Negative. and then the knockout punch comes. We will already be in a bad situation. Right now, I mean, you want to play this game? Today's the top. No, wait, wait, wait. I didn't mean today. Tomorrow's the top. You want to do that? You can do that. And people are saying, you know, this isn't grounded in fundamentals. This is too far, too fast. Totally wrong. Right? I mean, that's what I'm hearing. Too far, too fast since 2009. 2009, exactly.

33:54Michael Batnick:Because they hyper-focus on, They look at Micron and they say, the stock's up 10x in the last year and a half. This is a bubble. It doesn't make sense. Right. And they look at that and they don't look at the earnings growth. But I think the longer this goes on without a real recession, I think the more emboldened or confident people get that it has to end badly at some point.

34:10Downtown Josh Brown:Like it's been too long, but it's just - Well, that's the Minsky moment where people become so complacent that that becomes the risk. The lack of fear itself becomes the biggest risk in the market. Well, let's think about what's happened this year. So you come into this year, people are talking about an AI bubble, right? That was probably the biggest question we got last year. And I think a lot of that was more on the demand side. Are people actually going to use this? Are we going to engage with chatbots? Are businesses going to make use of this? X percentage of businesses say they have no idea what to do with this.

34:44To the market having to catch up in a five-month period to the fact that artificial intelligence is going to be ubiquitous. It's going to be in everything that we do in perpetuity. It's not going to be us engaging with a chatbot occasionally. It's going to be persistent engagement with artificial intelligence. And that's a level of growth and a shift in the economy that the market had to really get its head around. And the market wasn't there in the beginning of the year. And you look at what the earnings have been. The valuations haven't increased because - They've come down. They've come down because the market - The stocks respond to the earnings.

35:21Michael Batnick:What a concept. That's a great point. So one area of the, of Josh asked, like, are investors too bullish or are they taking too much risk? I think there's probably a cohort of, not probably, there is a cohort of retail investors that have been, I hate to say lulled to complacency. It sounds so condescending. Somebody that's made a thousand percent in AMD is hearing me say that they've been lulled into complacency. It's like, Hey asshole, I'm up a thousand percent. What are you talking about? It sounds rude. So I don't mean it that way.

35:44Downtown Josh Brown:Complacent all the way to the bank.

35:45Michael Batnick:Yeah, exactly. Exactly. So I don't mean it that way. But, uh, retail investors, this is from Vander Research. biggest single stock selling. This was last week. Since November, 2023, $47 million led by semiconductor names such as Micron and SanDisk. So eventually they were taking too much risk. And okay, so they sold a little bit, but they've done extraordinarily well.

36:08Downtown Josh Brown:They have. They have. Selling stocks to the point that we made in the earlier chart. Selling stocks that have doubled or more.

36:14Michael Batnick:Yeah, it was too crowded.

36:15Downtown Josh Brown:Year to date.

36:15Michael Batnick:Yeah.

36:16Downtown Josh Brown:All right. Savita Subramanian, Bank of America, equity quant strategy group, time to take profits. This is, I think, the biggest research piece of the week. I want to share some of what she said and get your reaction to it. And we hate her, so you can say whatever you want.

36:34Michael Batnick:No, we do not.

36:35Downtown Josh Brown:The S &P 500 is up 11 % year to date, multiples compressed to 21 from 22 times at the start of the year. An earnings revision that trumped returns, especially in energy and tech, the two best performing sectors. But financials, healthcare, and discretionary have seen losses year to date despite positive revisions. She doesn't like that setup where expectations are ratcheted up, but multiples are not reacting positive, are not reacting positively. And she has a point because that's sort of one of her bear market signposts. She's got like these 10 things that are red flags and seven of them have now triggered 70 % of her bear market, which is the average that they've observed at prior market peaks.

37:24Downtown Josh Brown:So the comparison that she's harping on is February of 2000, which for you and I is very ominous. Very ominous. We know what went on then. Last thing from her before I get your reaction. So she is saying high PE stocks led low PE stocks by a wide margin, which is a sign of excessive speculation. That's one of her triggers. Another trigger, lofty long-term growth expectations, breaching levels consistent with equities being more vulnerable to disappointment. So that's that last point I made. The sell side indicator hasn't been triggered yet. That's where the strategists get all bulled up, but that has gotten worse because they're chasing the market, quite frankly, with their targets.

38:09Downtown Josh Brown:But she's talking about this dispersion, tech versus everything else, and then inside of tech, like AI tech versus software or every other. And that is reminiscent of the peak of the market in February 2000. There's obviously a lot of differences here, and she knows that, and we know that. But I'd just love to get your take on this idea of time to take profits, just based on how eerie some of the similarities are. I guess the question would be, if it's time to take profits, what are we doing with the profits? And is that going to cash and sitting this out for a while? No, she's calling for a value rotation.

38:48Yeah, so it's about a diversification story and a rotation. Take profits in tech. Take profits in tech, move into other cyclical parts of the market or move into non-US dollar assets. Yeah, look, that was our view two years in a row. And that view got disrupted two years in a row. So what would you need for that? you well you have good starting valuations but you need catalysts for usually the catalysts come from fed easing so the rate differentials come down between the u.s and the rest of the world lower rates helps you know more higher indebted parts of the market so you can get there and i think that we will get there i do think that we will get back if you think about the second half of 2025 things broadened out a bit again once we got past liberation day so oh yeah We had an international stock rally in 25.

39:38It was awesome. I think we can get back to that place. But yeah, we're going to need to see some type of reasonable outcome out of the straight, or it's going to be difficult for more cyclical parts of the market to do well.

39:54Downtown Josh Brown:Let me show you some charts. So this is what she's talking about. The spread between the top and bottom performers inside of tech looks exactly like the dot-com bubble. if you were a tech stock in the year 2000 and not building the internet or mobile phones nobody had any interest whatsoever we had a similar phenomenon this year a lot of tech stocks not up but just that one theme do this quickly chart seven and the dispersion was not was a result of outsized gains from the top performers and that also happened in February of 2000 right at the peak of the tech bubble It was just this runaway group of stocks like you remember Cisco.

40:36Downtown Josh Brown:Of course. Intel, Microsoft. Okay. Chart 8, we'll do these together. These are the red flags. So the spread between the best and worst S &P 500 performers is near COVID levels. Not a great situation. Hopefully it's being fixed. We're in the process of that being fixed right now. And then the widest dispersion within Infotech. so you can kind of mentally understand that that similarity, just mark like the concentration of winners within one sector, even to the exclusion of other companies in that sector. This is not like when energy rallies and they all go up. Right. This is like, I don't know, 800 publicly traded tech stocks at this point and 300 of them are up huge.

41:20Downtown Josh Brown:That's the scenario. So that doesn't have to fix itself with a crash. No, it does not. It could fix itself the other way, which is what you're arguing for. Which is with the broadening of the market. Now, what you had in 2000, you had a rate tightening cycle, right? I mean, that's how these things end. These things end with higher rates and the economy that rolls over. The positive coming into this year was stimulus, not just in the US with the one big, beautiful bill. It was about insurance cuts. Yeah. And insurance cuts, right? We were going to lower the funds rate to 3%. So that's the big difference between 99, 2000 and today.

41:58And I think that's why you get the sell-off on Friday. Is this the beginning of the rate tightening cycle that ultimately ends it? Because you're not going to get a narrowing of that dispersion if you're not in an easier policy environment.

42:12Michael Batnick:I want to get your take on the consumer and the economy because there's been so much thrown at us starting in 2022 with inflation and then interest rates, um, and a commercial real estate crash, which was going to take the economy down. It didn't. Uh, now we're dealing with a frozen housing market, which is kind of a big part of the economy. Uh, we dealt with tariffs, uh, the straight of Hormuzes closed. We have higher oil prices. Um, and yet the labor market seems to be accelerating at least in, in, you know, in the last three months we've, we've been okay. What is it going to take to slow us down?

42:50Well, household net worth right now is about$175 trillion. That's an all-time high. And if you look at households, their liabilities to their net worth is historically low. Dwarfed. Yeah. So the fundamentals of U.S. households are far better than people think. You remember a few years ago when we were coming out of COVID, they were talking about credit card delinquencies and$6 ,000 balances and all. It turns out that was all just Taylor Swift tickets, so it wasn't a problem. No, that was all inflation-related. So the household's in good shape. We know we have a K-shaped economy, right? Because a lot of the household net worth gains have accrued to the top part of the K.

43:26When you have spending that persists at the top income quintile or the second income quintile, the economy's going to be just fine. It's when those quintiles really tighten their belt that you go into something more like a recession. If the bottom income quintile slow, not to be flipping about it, but that's more of a slowdown in activity. So what we're having here,$4.50 nationally on gasoline hurts. People in L.A. hate when I say that because what do you mean?

43:57Downtown Josh Brown:But it doesn't hurt the stock market. But it doesn't hurt the stock market because, you know, this is not a very – this isn't an economy that's overly energy intensive. Well, take L.A. Take L.A. Take Malibu, Calabasas, whatever. Like whatever Tony area within LA. Yeah, they know, of course, the gas price is stupid, but not one of them is changing their lifestyle based on it. And those are the consumers that show up in the S &P 500's earnings. The bottom 20%, a lot of their spending, frankly, is government subsidized spending anyway. And the earnings impact of that, it's de minimis. I'm not saying that's good or it's bad.

44:38Downtown Josh Brown:I'm just making - That's just the reality of it. It's just the reality of it. in the world that we exist in. It's horrible to have 20 % of US households living paycheck to paycheck and have like high gas prices stop them from being able to take their kids back to school shopping. It sucks. Yeah. But it's also the reality that the S &P is unfazed by that. Right. And that's when it becomes more calls about industry or sector or more specific names and discretionary gets hurt when you see gasoline prices go to where they are. But in terms of the broad market, the way that we're structured. It's not a very, you know, a near-term spike in gasoline prices is not going to derail that.

45:17Downtown Josh Brown:If you had one indicator, like if you were to just say, this is the only indicator I'm paying attention to as a call on when the top of that K is in trouble, Michael and I have been talking about hotel stocks. And some people would say like airline stocks, but maybe less pure because they have that gasoline problem, a jet fuel cost problem. Yeah. So hotel stocks. Hotel stocks seem like a great one. Perfect, right? Perfect one. And I have a sister who works at Hilton. All-time highs, all those stocks. Yeah, doing quite well.

45:45Michael Batnick:So let me ask you this. There's obviously a couple of different takes you could have on this. We know that this economy and the consumer is heavily levered to the stock market. Obviously. Speak about the borrowing and the margin debt chart that I showed earlier. So at the peak in the tech bubble, John, chart 11, please. The household equity allocation to stocks and mutual funds as a percentage of GDP was 116%. And today it's 191%. So it's significantly larger today, the amount of money that we have in stocks relative to the overall size of the economy. So you could say, uh-oh, if the stock market comes down, the economy's going to come down with it.

46:21Michael Batnick:And I don't mean like the stock market getting cut in half. The stock market gets cut in half because the economy's doing terribly, right? Okay. But I think that you can make the case that, all right, so 191%, if this pulls back to 170%, I'm talking about the wealth effect. This pulls back to 170%. Does the consumer stop spending money? Like where would this line have to go?

46:41Downtown Josh Brown:Right, how bad does this have to get before it spills over into the real world?

46:46Michael Batnick:So the stock market falls 30 % and stays there? Like what would have to happen to the stock market to change the uppercase spending habits? Because that is what's driving the stock market. And I know it's like sort of a circular conversation. It's a circular conversation. It doesn't have to end just because you're in the circular momentum of it. It ends under similar conditions, which is there's too much leverage and excess in the economy. It's too much inflation. the Fed kills it. So at some point, we'll get there. Right. It's just at some point you will have an environment where this will become too excessive, not necessarily where our stock market ownership is, but you'll have an overheating economy and this will roll over.

47:22And if it's a minor recession, you'll be down 20, 25 percent. It'll take a couple of years to get back to where you were. If it's a more significant recession, if you're way over levered and you're coming at it from a very vulnerable position, you know, you could see it markets come down 40, 50 percent. And it takes 10 years to get back to where you are. It really depends on the starting point. You know, Josh had mentioned earlier, it's not a particularly over levered economy. We talked about the household being in good shape. Businesses are generally in good shape. Last I checked, net interest payments of businesses are historically well below where they were going into COVID.

47:59So I look for it as a, not just because that number is elevated, where are the vulnerabilities? And it does not appear to be nearly as vulnerable as I think some people suspect it might be.

48:12Michael Batnick:On the economic side, I would agree with you, but on the stock market supply side. So you wrote a piece about narratives following the stock market sell-off, and that's almost always the case, right? Like the stock market falls and we're looking for reasons as to why it did what it did. And I, I'm 99 % with you. I think in this particular recent sell-off, I think the narratives were pretty clean and actually shouldn't be swept under the rug. So for example, Broadcom's revenue miss. Yeah, whatever. I mean, Micron had a massive beat in March. The stock sold off 30 % and then it rallied 300%. Right.

48:45Michael Batnick:Right. So like there's a lot of short-term noise in here, but, um, the, I think the strong job numbers and the re-rating of expectations for rate hikes, I think is real. I think the -

48:56Downtown Josh Brown:Real in terms of it's having a real impact on psychology.

48:59Michael Batnick:It's having a real impact. And it's in the market. Like people are expecting the Fed to raise rates. They just are. And I think that matters. I think the SpaceX IPO, we're going to talk about that in a second, certainly noteworthy with others coming down the pike. Is it Pike or Pipe? It's either actually. Oh, is it? I think it is. Yeah, it could be either. I think it could be either. Okay. But also - If you're in England, it's the Pike. And a U in flavor. But coinciding with the insane crowding into the momentum factor and also the Google equity issuance. And it was, there was chatter of, wait, are more companies going to issue equity?

49:36Michael Batnick:Like, I think the stories are legitimate. I thought that was a pretty big story with the Google equity issuance. Pretty much a non-event.

49:43Downtown Josh Brown:But it's a narrative change. Berkshire Hathaway comes in and invests in it. I mean, that's not usually what you would expect from a, you know, a long-term value investor if this was a significant challenge where they take like 10 % of it. So yeah, I actually thought I looked at the Google event as a pretty promising event from, you know, from, from that perspective. Promising on the bullish side. Yeah. Promising on the bullish side. I mean, you have a, I mean, the market was able to digest that without incident and you had a Berkshire Hathaway stepping in wanting to own it. That's like the second deal he's ever done since taking over.

50:15Downtown Josh Brown:Yeah. Greg Abel. Like he did an acquisition and he did that within one week. And it's a financing deal. He's not, Berkshire's not building data centers. So it's financial.

50:25Michael Batnick:On the SpaceX thing, Josh and I were joking the other day. I think Morgan Stanley said that their revenue could reach$3 trillion by, I think it was 2040 or something. Like these are the type of things that if you look back, and I'm not suggesting that this is the top, but that's the quote. That's like the thing that you're like, wait a minute, how are we so stupid? Right. Like it's, they said$3 trillion in revenue in 2040. And we were just like, okay. Um, okay. So the other question is how much, how much, um, liquidity is really available from investors pockets to finance all of this happening.

50:57Michael Batnick:Demand for space is from Barron's demand for space X is$75 billion IPO stock has reached $250 billion making it 3.3 times oversubscribed. So it appears like we're going to swallow a fake number.

51:08Downtown Josh Brown:What, what, go ahead. The oversubscribed shit is fake. Like, so do you remember Cerebris went public in the middle of May? I'm on TV next to people who are saying it's 20 times oversubscribed. Well, what the f*** did that mean? It went down 100 points over the next three weeks. Like that, you could just make up a number and say it to a reporter and they will go on the air and say, the SpaceX deal is 12x oversubscribed. First of all, where do you get that number from? Oh, an investment banker told me. Like, nobody like actually knows what the demand is because it's indications of interest. So you call up a retail investor, in this case, 30 % retail, say, if we can get you 100 shares of SpaceX at$135 a share, do you want it?

51:52Downtown Josh Brown:Yes. You don't know if they're going to pay for it. If it goes up, they'll pay for it. If it goes down, they're not going to pay for it. And therefore, I don't care how oversubscribable. I did the indication of interest myself. I was a branch manager. I promise you it's bullshit. But on my scale, these were tiny deals. We would raise$8 million for a company. At this scale, I would bet the bullshit factor is 10x because everybody wants stock. Everybody wants to be the lead placement person on the syndicate of stock. Like people are just calling in orders that are completely fictional to make sure that the real orders are covered.

52:32Downtown Josh Brown:And that's the other aspect of this. if you have legitimate demand for 2 million shares of SpaceX at an investment firm, 2 million, you put in for 10 million because all you're hearing about is how oversubscribed it is. So if I want the two, I better say I want 10. If I say I want two, I might get one. So retail, will retail investors

52:55Michael Batnick:be left holding the SpaceX bag? They don't think it's a bag. They, they, I didn't ask you, will they be, will they hold Elon's bag? What does that mean? Are they exit liquidity?

53:04Downtown Josh Brown:Is the IPO going to fall apart? Dude, I know retail people who are being offered stock that are able to sell a minute later. Nobody's telling them they have to hold it. All right. Will this fall 50 % like a lot of other big IPOs in the first three months? I think a lot of that is, so my personal opinion is a lot of that is pending. What are the market conditions? Will this hold up in a correction? Definitely not.

53:25Michael Batnick:Okay, let's just assume a normal market environment. I know I'm asking you to make a prediction. Will this thing fall 40 %? Because it is hyped. like i my dad asked me okay i think it will open i think it will open 30 to 40 percent above the

53:38Downtown Josh Brown:offering price that's my that's my opinion um i do not think it'll hold that gain and i don't

53:44Michael Batnick:think it'll build on that gain they're coming to market i think the price is 130 so you expect it to open whatever 170 180 okay the price is 135 do you know why because elon told the banks the

53:56Downtown Josh Brown:price is 135. So what? So what? A real IPO, a traditional, I shouldn't say real, this will be very real. A traditional IPO. It's a process. It's a roadshow. There's feedback from institutional investors, not retail investors, but like people managing$80 billion,$200 billion. Tell the underwriters, we wouldn't pay 20, but we would probably be very comfortable paying 16. And then all of that gets factored in. And then of course it's all made up because Elon is, Elon is a different, he said one 35. So that's the price. And everyone's just like, yeah, that's, that sounds right. Let me pay 20 % above that.

54:37Downtown Josh Brown:That's what's about to happen. I think they'll get the pop. I can't imagine them not getting it. Your real question is, does it hold the pop?

54:44Michael Batnick:No, my question is, all right. So you said it pops from one 35 to one 70, whatever. Will it be at 90 at some point in the next six months?

54:50Downtown Josh Brown:I think, I think you'll get another crack at it at one 35. I think the bigger question is, is this just an idiosyncratic event happening in the market or is what we're discussing here something larger than that? Well, there's two more of these right behind it. Right, and is this something larger than that that investors need to be worried about? I'm not ready to get there, in my opinion, that this is something that's going - Oh, like, is it so much money to be raised that it's gonna take a bite out of the rest of the stock market? They're gonna take a bite out of the rest of the stock market or it's indicative of a market top.

55:20And if you actually look at the IPO activity, yeah, we've got a couple of high profile ones coming to market, but this is not the level of IPO activity that you would normally deem to be speculative. The size of the big three are quite large, but it's not as if we've got speculative levels of IPO activity in these markets.

55:40Downtown Josh Brown:These will be heavily, all three of these will be heavily involved in the big ETFs. And that's the thing that people are talking about. People are worried about it. And you see these headlines that the AI bubble's coming for your retirement account, right? That's nonsense. That's nonsense. That's journalists. And that's what I want. Investment people are not saying that. Yeah. And that's what I wanted to make sure that we were covering here. As we debate this, is it just something idiosyncratic that we're going to be watching? It's going to be a stock story that we're going to be watching. All right, wait.

56:06Downtown Josh Brown:So two trillion, this is market caps, not dollars being raised. But just hypothetically, for index construction purposes, two trillion for SpaceX, a trillion for Anthropoc, a trillion for OpenAI. it's$4 trillion. I mean, that's meaningful amount of market cap that is going to require some space in the Qs, eventually in the S &P. Eventually. Like, right. But wait, but they are being adjusted for the float, dramatically adjusted for the float. Well, they would have to be. Otherwise, it would make no sense.

56:38Michael Batnick:SpaceX would not be a$1.8 trillion position in the NASDAQ 100. Correct. Thank God. It'll be free flow based.

56:44Downtown Josh Brown:It won't have the proportion of a$1.8 trillion.

56:46Michael Batnick:Elon's, what does Elon own? 40%. So his, so take that out. Take that out. Right. Okay.

56:52Downtown Josh Brown:So you're not worried about that. I'm not worried. You don't think that's a real headwind for the market. I don't. How about the converse of that, which is these IPOs, or at least SpaceX comes, goes off without a hitch. Everybody's happy. Is that a bullish catalyst?

57:07Michael Batnick:Yes. Well, what are the bears going to say if this, if these IPOs don't crash the market? What's the next thing?

57:12Downtown Josh Brown:The bears want this to be an asteroid. It has to be for them. Right. They do. So what if it's not? Is that, what does that do? Does that galvanize the investing public that all is well, this big bad thing that everyone's told you to worry about is over and look at the risk appetite. It's very healthy. I think it does. I think it does. I like that. And I think it helps the financials. So, okay. Well, it's definitely going to help the, maybe not the spread financials, but the fee financials. The fee financials. By the way, to your point,

57:42Michael Batnick:I know you guys have a relationship with NASDAQ. like Nasdaq stock is not doing awesome. You would think that if it was like a super frothy, elevated, excessive IPO market, that Nasdaq would be, and I know you can't comment on the stock, but like it's whatever, it's going sideways. There's no froth here. No.

57:58Downtown Josh Brown:Okay, so not a wealth destruction event. No, not a wealth destruction. The largest IPO in history will not be. Didn't they talk this way about Alibaba 12 years ago? Yes, they did. They said it's too big for the New York Stock Exchange. Yeah, I think we did this with Saudi Aramco too. Yeah, I remember 2014 being an okay year in stocks, 2015 too. Hold on, let me just say, if this is a top, you are going to act like it was so obvious. No, I'm not. Isn't that what we do? Yeah. It's so obvious. No, I'm really not, but I won't be completely shocked. I don't, so I don't, here's the question. Are the bears saying it's a top because it's going to cause a top by virtue of sucking all this capital away from other, or the bear is saying it's a top because it's a sign of excessive enthusiasm or are they saying both i've heard both i've heard both but i think it is that sign of excessive enthusiasm you know like your parents tell you when somebody gives you two reasons for something both are not true yeah like that's how you know they're like uh i call michael and i say hey um you you want to you want to go hit golf balls at the driving rate she's like i'm not feeling well and also So my wife needs me to help her.

59:10Downtown Josh Brown:So neither is true. Neither is true. You have plans with somebody else. Right. Exactly. You're sick of listening to the sound of my voice. And I totally got that. I think it's a valuation story. I think that investors just, there's plenty of investors who would think of valuations as a timing tool, think that if things are getting frothy, if the shiller PE is too elevated, if the margin levels are, this all can't be true. And so there's the big bang moment coming. and when it wasn't Silicon Valley Bank, then it was tariffs. When it wasn't tariffs, then it was the war in Iran. When it wasn't the war in Iran, now it's going to be SpaceX.

59:46And I love this so much.

59:48Michael Batnick:So there's like this thing where 17 of 20 indicators are flashing red. Well, if they've been flashing red for three years, maybe they're the wrong indicators. Maybe they're the wrong indicators. I mean, I try to keep it simple. And, you know, like our credit spreads widening. No. No.

1:00:01Downtown Josh Brown:So what are the things that matter? Credit spreads. They tell you what you need to know. So I look at leverage, inflation expectations, Fed policy, credit spreads, bank lending standards. That's my cycle analysis. So I noticed that you don't have anything in there about chief strategist price targets. No, I don't have chief. You also don't have anything in there about P.E. ratios. No, no, because P.E. ratios. I mean, if I where I would use a P.E. ratio is if I was making a five to 10 year return, maybe more like a 10 year return expectation, you would need to have some reversion to the mean on valuations over a 10 year period because there's a high correlation there, but there's nothing with, you know, one and three.

1:00:40Downtown Josh Brown:Say your list again. Say your list again. All right. Let's start with credit spreads, credit spreads, bank lending standards, the strength of the dollar, inflation expectations, leverage. What does the strength of the dollar tell you about the forward outlook for stocks? Well, it's interesting that the dollar has not rallied substantially. So if we think about, you know, in 2015, in a very weak growth, deflationary environment, the Fed was going to raise rates. The dollar soared. That's not what this is. I mean, the dollar was likely to weaken this year until the war in Iran started. And so the dollars had a reprice basically from expecting an easing cycle to no cuts to maybe a rate hike.

1:01:23So the dollar gets a bit of a bid there, but it's not skyrocketing. It's not going to levels that would make you think there's this huge flight to quality and that the cycle's rolling over.

1:01:34Downtown Josh Brown:What do you think is the most underrated thing going on in the economy or the markets or both that should augur well? So we talked about all the bear stuff. Yeah. What are the things that not enough people are excited about? Like for me, let me set this up. So we did a segment today on CNBC about one of the names on my best stocks in the market list and it's from a Travelers. Travelers is like not an exciting company. It's a couple of bucks away from an all-time high. Why? They're one of the first companies that's got tangible evidence that their AI investments are. So if you think about all the areas where AI should help companies, risk management and insurance underwriting should be the top of your list.

1:02:22Downtown Josh Brown:This is like the most obvious thing in the world. We have algorithms. Let's let the AI loose on those algorithms and see if we can improve how much money we end up surrendering from bad underwriting. So they announced a 21 % year-over-year jump in underwriting profit. And on the conference call, they told Wall Street, this is the f***ing AI. That's what's going on. It's not a magical thing. Okay. Okay, so if the rest of the market becomes littered with stories like that about stocks where nobody is associating them with the AI, but the AI customers start to surprise on earnings to the upside, A, you'll get your broadening.

1:03:11Downtown Josh Brown:B, it would be a really interesting juxtaposition versus the last three years where we all have been myopically obsessed with the 100 picks and shovels companies selling us AI. Wait, what if the real trade all along was investing in the most talented consumers of AI as they outdistanced their competitors in earnings growth, thanks to those investments? Wouldn't that be such a cool story and great for investors? Oh, absolutely. So what do you - Absolutely. And we're so - You think that's likely? Yeah, I do think it's likely. I mean, I think it's already starting to happen in many ways. I I mean, we're in the early innings of this.

1:03:52So you're right. We started with the chips and we moved to memory and the infrastructure build. But what about all the benefits? I mean, we're starting at this from an environment where corporate profitability, the number of employees is historically high. And that's only going to get better in the coming years. And you think about sectors that have not done well, like financials or like health care. I mean, those are places of the market where you would expect to see substantial gains as a result of incorporating artificial intelligence into that business, particularly healthcare, thinking about all of the challenges of life that we're going to unlock with new solutions.

1:04:31Downtown Josh Brown:One of the problems, and we could end on this. One of the problems with the picks and shovels analogy is people forget that analogy during the internet boom era, the first one, it was sardonic. It was saying, because in the actual gold rush, the 1849 gold rush in San Francisco, there wasn't any gold. like people ruin their lives chasing up into san francisco to look for gold that was never there like a few people found gold and it was it it was like uh it was a catastrophe for the people but like the idea was like well at least the picks and shovels sales people made money actually the company made the most money was levi strauss selling selling uh denim workwear yeah but fine we better hope this isn't picks and shovels and this is a failed gold rush.

1:05:27Downtown Josh Brown:I don't think it's going to be. We're using AI inside of our business right now. Probably 1 % of what we'll be using five years from now. And I think, and we're, you know, considered, I guess, a small business. Midsize businesses and publicly traded large size businesses, it's not a gold rush. They're literally improving their companies. So the picks and shovels analogy is like, it's almost too smart assy. This is like, this is real. So if we're going to have a continued bull market, I think it'd be really cool if it were powered by ROI from all the spending that we're doing in 2026. I agree with you completely.

1:06:05Downtown Josh Brown:And you think it's likely. I do think it's likely. Absolutely. Like, I don't see how this movement, this restructuring of the economy and this restructuring of how businesses are run. I don't see how that doesn't improve efficiencies. I don't see how that doesn't improve profitability and do it at a level where you're, I mean, you're gonna be doing it in a way that's gonna be likely lowering the costs of business. You said something early on about the ubiquity of AI. Right now, for most people, their experience with AI is prompting and asking for something. It's like a search engine. You're talking about waking up and seeing the results of what your AI did for you overnight.

1:06:45Downtown Josh Brown:Yes. That's where we're. Yes. Okay. This is a very different mentality. Very different. And most people haven't gotten there yet. Well, and quite frankly, like I said, the market had to catch up to it. Yep. This year. I agree with you. A gent. The market wasn't ready for a gent day. Correct. The market was still thinking in prompting terms. All right. Brian, you're the man. You had fun on the show today? I had a great time. Thank you. What was your favorite part? Probably talking about the Knicks. All right. Brian we always try to end the show when we remember asking people what they're most looking forward to what do you got personal business anything I'm looking forward to next week when my oldest daughter graduates high school good to good to yeah hard to believe yeah did you find her did you find her an internship for her junior year of college yet you have three years she wants to be Aaron Andrews so you know I guess we're sort of in the media business if you know anyone that can get her a sideline reporting job Let me know.

1:07:39Downtown Josh Brown:All right. Try to figure that out. All right, guys. Thank you so much for watching. Thank you for listening. I want to let you know you can follow Brian Levitt of Invesco on LinkedIn. Are you doing anything else on social or not really? I have a podcast. Okay. Tell us about it. Where do we find it? Greater Possibilities Podcast. Anywhere you find podcasts. The Greater Possibilities Podcast with Brian Levitt. Anywhere you find podcasts are played. Make sure you check that out. Thank you so much. Thank you. Great to see you. So great job, everybody. See you next week. Thank you.

1:08:15Downtown Josh Brown:You want to do that one more time or you feel like we got it? What do you think?

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