The Buy America trade

0:00Katie Martin: Today's markets move fast. Get the insights you need in 10 minutes with the Barclays Brief, a new podcast from Barclays Investment Bank. Through sharp dialogue and scenario based analysis, our leading experts analyze key market themes each week. So whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, stay briefed. Find Barclays Brief wherever you get your podcasts.

0:36Rob Armstrong: Pushkin. There's really no two ways about it. US companies are absolutely crushing it at the moment. We're well into earnings season in the States right now, one of the currently four times a year when listed American companies tell the world how they're doing. And the answer is, very nicely indeed. Thanks very much. A good chunk above 80 % of companies in the S &P 500 have beaten what were already pretty lofty expectations for the money they're making. And it's not just in AI. Today on the show, heaven knows, it pains me to say it, but it's the Buy America trade. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

1:23Rob Armstrong: And Katie Martin, a markets columnist at the FT in London, busily memorising the entire internet in advance of the FT Alphaville pub quiz tonight. All the way from over there in the land of bumper earnings, it is the big fella, Mr. Robert Armstrong, who today has been put in a special chair for recording this podcast.

1:46Katie Martin: It's true. I'm a bad boy and I move around a lot when I talk. and so our producer Jake has gotten me in a chair that doesn't move so I will sit still. And if this doesn't work, what restraints are coming next is an open question. Like he's going to zip tie my wrists to the arms of the chair. Whatever it takes.

2:12Rob Armstrong: Yeah, whatever it takes. This is the start of the fight back against a very wiggly, Exactly. A wriggly Robert Armstrong. It's true.

2:22Katie Martin: At 54 years old, I'm still the wiggly boy at the back of the class.

2:26Rob Armstrong: Sit still, Armstrong! We digress. Rob, tell me, what the hell? What the hell? Like, earnings season is just like...

2:38Katie Martin: I've never...

2:39Rob Armstrong: It's cray-cray.

2:40Katie Martin: I have never seen an earnings season like this. average S &P 500 earnings growth so far is like in the mid-20s percentage range year over year. If you look at a chart of earnings growth, we were kind of bumbling along at like 10, 11 % earnings growth the last couple of quarters. And then it just took the absolute elevator this quarter. And it's been amazing. I'm ashamed I didn't see this dramatic change coming, But there are a couple of fairly commonsensical explanations for this we could go through.

3:18Rob Armstrong: Yeah. But just a little bit more on the scale of this thing. So as you say, mid-20 % in the first quarter year on year, that's like a lot of earnings growth. It puts us at roughly a four-year high. And one of the weird things about that is that sometimes you see these explosions in corporate earnings growth when you're coming out of a recession or you're coming out of some sort of shock. So like COVID is over and the global economy reopens and, hey, corporate America does incredibly well by comparison with the previous quarter or by comparison with the previous year. Now it's just like we're not in a recovery.

3:57Katie Martin: It's just happening. I mean, just to put the size of what we're seeing right now in context, over the very long term, the average earnings growth rate for the S &P 500 in real inflation-adjusted terms is something like 7%, 7.5%. So we're going along maybe tripling or quadrupling the standard rate of growth this quarter. It is like an amazing event we're seeing. And it goes a long way to justify the dizzy heights that markets have hit.

4:29Rob Armstrong: Weirdly, it goes pretty much 100 % of the way towards justifying the dizzy heights in US stock markets at the moment. So we've talked about this on the pod before, but it is like double weird that you have stock markets like cranking higher, but without what we call multiples going higher. So investors aren't paying more for the same stuff. They're just tracking earnings. They're following fundamentals in corporate earnings.

4:54Katie Martin: Each dollar of profits costs you the same thing, right? And so there's just more of the profits.

5:00Rob Armstrong: So more profits, so line go up. So this is like, you know, it's very unusual for markets to trade on fundamentals. Like normally they trade on like, you know, hope and expectations and hype and vibes and all this sort of thing. Yes. That's actually like not what's happening in the States at the moment. So this is quite, it really is quite extraordinary. Henry, so look, AI is a big part of it. Let's talk about like, you know, there's tech companies that are making money hand over fist. Fine. I think we kind of expect that's going to be a thing, right?

5:28Katie Martin: But there's also one of the sectors that's growing earnings at a very lively pace this quarter is industrials. Like these metal banging, real world living in heavy metal kind of companies are doing great. And part of that, I wrote about this in the newsletter last week, is there's a handful of them where they're just building data centers and they're like putting in the air conditioners for the data centers and throwing the wires in the ground and putting the building up and et cetera, et cetera. So there is a handful of industrial stocks that have just gone bananas because literally they're beyond their capacity to serve the construction needs of the data center industry.

6:17Katie Martin: You know, you can't put the air conditioners in fast enough. Caterpillar, which makes industrial machinery for mining, construction and such in a characteristically yellow color, also makes generators that produce backup energy. So they'll roll up with a huge backup generator for your data center. They can't sell them things fast enough. And that's been like the best, you know, one of the very best stocks in the S &P has been Caterpillar earnings wise.

6:43Rob Armstrong: Yeah. So in fairness, you did call this one. Banks have been doing very well as well.

6:49Katie Martin: Yeah, they've been great. So two things working in banks' favor. One is if you're a bank that has a trading desk, so you're one of the big global banks, it's been a volatility playground out there. A trading desk doesn't need markets to go up. They need them to go zigzaggy because you make money on the zig and the zag. And so it's been a volatility carnival in the first going into the second quarter. So they're feeling great. The yield curve is still positive, which means short-term rates are lower than long-term rates. That helps banks that borrow short and lend long. and you know the economy is good enough that loans are growing so financials are growing their earnings at 20 percent you know it's a good look for them so that gets you two big sectors right there industrial's good financial's good before you even started talking about technology on that

7:47Rob Armstrong: point about the zigzags in in markets i was talking to some um fund managers last night and they were saying the whole zigzag thing is absolutely doing their head in. So like you've got like a portfolio of stocks and one of them will just like dump 15 % in a day for like no reason, like on some like random headline out of Iran. And they're left thinking, what's going on? Has something changed? Should we be selling this stock? Should we be buying the dip? What should we be doing? And then like two hours later, oh, it's recovered now. It's fine. It's nothing. And And so that, I guess, goes a long way towards explaining why the vibes are not that great, but the earnings growth is doing well enough to keep markets supported.

8:28Rob Armstrong: Is that like fund managers are just sitting on their hands saying, this is a nightmare. I don't know what's going on. But the zigzagging thing is perfect for bank earnings.

8:37Katie Martin: For the traders, it's great. For the fund managers, for the people like us who are paid to make sense of what the hell is going on, this is very difficult. But for the traders, they're like, great, you want to sell a stock down or up 15 % for no particular reason? I'm here for you. And by the way, the bid-ask spread on that stock will be high. So that goes straight into my pocket. Thank you very much. Thank you for playing the stock market.

9:03Rob Armstrong: Thank you for playing the stock market. We should talk about the demand for tech services.

9:09Katie Martin: So there's this whole AI story running in the background. But all the kind of normal stuff the big companies do, Google sells ads, Microsoft sells software, et cetera, on down the line, Meta runs ads against social media sites, all that part of the economy is doing well. So while they're spending all this money on AI data centers, the big companies are earning loads of money just doing the thing big tech companies do. So that's probably the strongest growth story is the technology growth story. There are exceptions here. There's all these worries about certain software companies will get murdered by AI and et cetera, et cetera.

9:53Katie Martin: But the basic background in demand for digital services is very strong.

9:58Rob Armstrong: Let's spend a little while on a phrase I'm told that I use too often, which is fun sponges. So there are people out there who are like, I just can't bring myself to believe that everything is as rosy as it looks. One organization out there that's saying that is Hussman Global Advisors, I think is their full name.

10:21Katie Martin: They are in the fun sponge business and have always been.

10:24Rob Armstrong: They are in the business of soaking up fun. Yeah. And a pretty reliably kind of Debbie Downers about market direction. But as they pointed out in a little note they did the other day, it is weird to have this level of earnings growth when you're not coming out the other side of some sort of recession or shock. That is legitimately actually quite weird. Yes. And also, it sort of assumes that AI won't come and kill certain sections of the stock market. So when you've got like a decent spread of companies that are doing well, no one's pricing in this possibility that AI could end up chewing them up.

11:01Rob Armstrong: So they're kind of reasonable-ish pushbacks, I think. But you just can't fight the direction.

11:09Katie Martin: It's true. And so the issue you just raised is the issue of sustainability. like where you know there there there is a case to be made that this is a bit of a sugar rush that all this stuff can't go on forever you know the oil companies are an example of this right not so much in the first quarter but in terms of what they're talking about how it's going now in the second quarter there's a shortage of the stuff that they make they're going to print it right but Yeah. One day, as the guy in Apocalypse Now says, this war is going to end, at which point oil prices are going to go down. Right. So that's a temporary phenomenon.

11:48Katie Martin: And I guess if you wanted to be a Debbie Downer about the United States in particular, you might say the consumer is not quite what the consumer used to be. So we saw that in the first quarter GDP report that the rate of growth of consumption is slowing. It's gently kind of returning towards trend. And in the other scenario in which the war doesn't end and oil prices go up, that's likely to get worse. I think, by the way, the U.S. consumer is doing fine right now. So McDonald's earnings just to grab a consumer company out of the air were fine. They saw, you know, real terms sales growth in the United States.

12:37Rob Armstrong: How much of that was down to you?

12:41Katie Martin: 15%. My son, my son accounted for 20 % of U.S. McDonald's sales this quarter. They have like a concierge following him around anytime he gets hungry. They just put a Big Mac in his hands.

12:58Rob Armstrong: Yeah. You can't go wrong with teenage boys and Big Macs. But I guess another thing that's going on here is that the U.S. is kind of sucking growth out of the rest of the world to some extent. So, you know, Europe and Asia, as we've discussed on this pod several times before, like we're on the sharp end of the energy shock. And you keep hearing these warnings. things. So, you know, Robin Wigglesworth, who was on this pod the other day, he was writing about this the other day on Alphaville. There's like plenty of analysts out there saying, OK, oil prices are kind of bobbing along at the moment. But there is a risk that one day we walk into the office and it's$20 higher or it's$50 higher.

13:40Rob Armstrong: Like this thing doesn't have to move in a smooth fashion. It can just hockey stick higher. And then surely we have a problem with the US consumer then. And surely we have a problem with corporate margins then.

13:51Katie Martin: It is true. But to get to your U.S. sucking the growth out of the rest of the world, if you are a U.S. industrial company that uses natural gas as a feedstock, so you make chemicals or you make fertilizer or you make whatever it is you make, you are at a massive competitive advantage to your peer company in Europe because we got gas coming out of our ears locally here. You know, we're trying to send it away as fast as we can. And so that goes directly to your point of the energy shock hitting different regions of the world differently. And, you know, America is just lucky that we discovered that we're basically floating on a huge pool of natural gas in this country, or at least in Texas and In Pennsylvania, we are.

14:42Katie Martin: So that's something really compelling. But look, you know, to your point, we're not going to grow earnings at 20 plus percent forever. This is a blip.

14:50Rob Armstrong: Surely.

14:51Katie Martin: You know what I mean?

14:52Rob Armstrong: Surely. Yeah, yeah, yeah. Yeah. But we still have this thing where like the stock market is like, yay, everything is awesome. And the energy market is like, hell world, hell world. It's true. Be afraid. And there is, to Robin's point, there is a moment.

15:08Katie Martin: If we don't get – there is going to be a moment if we don't get the Strait of Hormuz open where inventories simply run dry in the world. You know, Malcolm Moore did a great piece about this for us a couple of days ago. We are drawing down inventories still. And so – and at some point, maybe it's in September. You know, as one street energy analyst said it was sometime in September, inventories would go as low as they can go. And so the only flexibility left in the system is demand destruction at that point. You just have to use less of the stuff. And we are seeing some demand destruction in energy in Asia right now, some in Europe, none in the United States.

15:52Katie Martin: But if we get to that day in September where, as Malcolm pointed out, you can't run the system on zero inventories. You know, like the pipe has to be full of something. You know what I mean? You can't run the tanks dry. There has to be some gas in the cars at any given time. I mean, I would say you've put your finger on the terrible scenario is that the whole situation is predicated on the straight being open sometime in June, say. Right. Just wide open in June. If it's closed shut in September, what do you call it? Squeaky bum time at that point? It's squeaky bum time. It is squeaky bum time.

16:33Rob Armstrong: One thing that I think is interesting here is the hype and hope has kind of been knocked out of stock markets. And it's just the earnings that are doing the heavy lifting. I wonder how much higher we would be if we had the good vibes on top of the earnings. So things look great, but they could look a lot greater. Yes. But we should be glad.

16:53Katie Martin: Katie, let me interrupt you. We should be glad it's not. Right? The market is in a sustainable place right now. And that's something to be celebrated. Bad vibes plus good earnings is a market I want to own, right? Because good vibes turn to bad vibes, right? And you can't predict when. So if the vibes are only so-so and earnings are good, that helps me be calm.

17:17Rob Armstrong: Eventually, vibes always chicken out. Listen, one other thing I want to talk about is the reason why we've got such great earnings out of companies at the moment is that they are reporting earnings, which is a thing they currently do on a quarterly basis in the States. One of the biggest U.S. financial regulators, the Securities and Exchange Commission, the SEC is moving forward with these plans to cut reporting requirements for U.S. companies so that they might only have to report semi-annually instead of quarterly. This isn't a done deal yet, but it's pretty close to being a done deal. And the theory behind this is, and I think this is something that you sympathize with, Rob, is that let's free corporate America from the shackles of writing long, tedious earnings reports that nobody reads.

18:05Rob Armstrong: And this will enable them to do more innovation. I guess my thinking on that is show me the evidence that this is currently hurting. Yeah.

18:19Rob Armstrong: I don't get it. And I think some investors that I speak to say, look, one of the reasons why the US stock market is the Mac Daddy and its base is home for a lot of global investors is precisely because it reports every quarter. It doesn't matter what kind of crisis is going on. It doesn't matter what war there is where. So help them. US companies always report every quarter. That's not necessarily the case in Europe, for example. Some of them are less frequent than that. So, I don't know, construct the argument for me that this makes any sense to remove this requirement.

18:54Katie Martin: Well, I wonder how much it really helps investors. At some point, the information is just causing a lot of mindless trading on increments of information that actually aren't that important. And to the degree that investors could keep their eyes firmly locked on the long term rather than the tiny squiggles that happen in a given quarter, maybe that would be good. By the way, I'm sympathetic to your point. It's like the U.S. market sure doesn't look broken right now. So why would you try to fix it? But let me ask you this, Katie. Let me turn the question on you. Those big European companies that report only twice a year and then sort of have mid-period sales updates, is that such a bad system?

19:44Katie Martin: Are you left wanting more by those big European firms?

19:49Rob Armstrong: I'm not necessarily left wanting more, but I do think the context here matters, right? So in the States at the moment, like regulations are just falling away left, right and centre. So it just strikes me that right now, like allowing companies to say less in the States feels like potentially storing up problems. I don't know. I could be worrying about nothing, but I do think the context matters. And I do think there's no evidence of harm currently.

20:18Katie Martin: So just, yeah, let's just keep going and hope the good times roll.

20:21Rob Armstrong: Yeah, but that's not going to happen. They're going to change it whether we like it or not. Speaking of things that are going to happen whether we like it or not, we are going to have to come back in one sec with Longshot.

20:48Katie Martin: Investment Bank. Through sharp dialogue and scenario-based analysis, our leading experts analyze key market themes each week. So whether you're managing a portfolio or leading a business, the Barclays Brief podcast can help you make smarter decisions today. Stay sharp, stay briefed, find Barclays Brief wherever you get your podcasts.

21:11Rob Armstrong: Okie doke, it is time for long, short, that part of the show where we go long, a thing we love or short a thing we hate. Rob, we received complaints that we ran out of time for your long short the other day.

21:26Katie Martin: So you should go first. I've got a short for you. I think, Katie, I've reached an age where I am short the open bar. I was at an FT cocktail party last night, an FT weekend event. It was a very nice event, but it's open bar. And I have these two vectors of my personality, which are likes to drink bourbon and is cheap. And those two lines cross at open bar where I'm like, I have to have a couple of extra bourbons because they're free.

21:58Rob Armstrong: Yes.

21:59Katie Martin: And this, you know, this was maybe an acceptable situation 20 years ago for me physiologically, but I've got to be short it now. And like drinking more is not a money saving strategy, as it turns out.

22:12Rob Armstrong: No, no. Okay, well, I'm sorry to hear that. I am long deer. The economist writes to inform us that the British deer population is exploding.

22:27Katie Martin: Is it?

22:27Rob Armstrong: Led by those cute little muntjacks, which recently pitched a friend of mine off his bike and knocked him out. Anyway, the economist tells us that the rise and rise of the deer population is a case of stagflation.

22:44Katie Martin: Oh, God, that was all worth it. I was like, where's Katie going with this? But we got to stagflation. It was all worth it.

22:54Rob Armstrong: It's pretty clear to me that someone in a newsroom somewhere started with a gag and worked their way all the way back from that until they could justify writing 450 words about the British deer population. I'm not above going with the pond first and coming up with the content. It's a time-honored strategy.

23:14Katie Martin: You can't lean on it too often, but once in a while you can slip that by the desk.

23:19Rob Armstrong: Oh, yeah. Anyway, stagflation. Hats off to those boys and girls at The Economist. That's a good gag. Righto. Listeners, we are going to be back in your ears on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer.

24:00Rob Armstrong: I'm Katie Martin. Thanks for listening.

24:15We'll be right back.