Reattached

... then they reattached.

Um, look, for us, uh, what we're telling equity investors is focus on earnings, right? Again, another 25, 50, 75 basis points is not going to derail this bull market.

It's not going to fundamentally impact the pieces of capital spending that are driving this economy.

So focus on earnings.

Let the- the bond market be the bond market and the yields be the yields.

The market's already absorbed this idea of another 50, 75, even 100 basis points of rates.

Do you think that the market has shown appropriate discipline thus far with all of the various cross currents that are affecting it? BTIG's Jonathan Krinsky saying he sees broad complacency out there.

Does this make sense to you? How would you broadly describe the kind of trading activity, market activity that we've seen this year?

Well, that's a big question, right? So I think what we've seen this year is a market that's gone through a couple of phases, right? The first half of the year was kind of lots of anxiety about the AI trade, a repricing of risk, a return of risk premiums, kind of in the May to July timeframe.

We had the mania around semiconductor stocks.

Yep.

In there, and we've had the huge rotations underneath the surface of the market.

I fundamentally believe, as we came into August, I was the most constructive that I had been the whole year.

Really? Why? And the reason really comes down to the fact that we were able to really look at what happened with second quarter earnings.

So should the Fed spoil the party here?

How did you end up at Goldman Sachs?

Oh, my gosh.

Well, that's quite a journey.

I will say about the timing of my studying Japanese, as I said, it was a very unusual thing to be able to study Japanese.

And so when I started taking those classes, it was maybe 20 of us.

And by the time I graduated...

Because at that time, Japan was really growing in prominence as an economic power in the world.

So what gave you the idea to found Extraordinary Women on Boards?

How much are we seeing that with stock prices as well, in the sense that there has been a scarcity of paper for so long that there was a power of equity valuations that's getting now diluted to some degree by some of the massive IPOs that are coming to market?

Yeah.

So, you know, I mean, this is one of the things we've been talking about for a long time, and, and this is where we talk about PE evaluations, right? And we've said to folks, look, multiples have peaked, and you're probably gonna get compression.

So that's why earnings power is so important.

You're not gonna get scarcity premium, right? Um, so, uh, you know, and, and in addition, you know, you guys talked at the top, at the top of this hour, uh, about, you know, the movement of capital.

We're, we're seeing, you know, share repurchase, which used to be a huge source of demand in this market, and it was coming from the hyperscalers, uh, you know, begin to go away.

So all of these things, you know, kind of put together are, are saying, you know, we are now, uh, seeing an erosion of the scarcity premium.

That's a difficult p- moment to be in.

How do you sustain an investment plan given legitimate complexity?

I think you can't sustain one plan.

You can't be anchored.

Our watchword right now is hypervigilance.

One of the things that has been very interesting to us that has differentiated 2026 from really the first three years of this bull market has been underneath the surface of the index, we've had extraordinary dispersion of individual stock performance.

So if you're a stock picker, which I grew up being and haven't really been able to do for the past 15, 17 years, this is Christmas.

And there's lots and lots of things to do below the surface.

And I'm curious, is that more driven by what's going on in the energy markets, the fact that Asian economies tend to be oil importers, or is there something else there?

It's a complex situation." How do you sustain an investment plan given legitimate complexity?

I, I, I think you can't sustain one plan.

You can't be anchored.

We're, you know, our watch word right now is hypervigilance.

Um, one of the things that, uh, has been very interesting to us, uh, that has differentiated 2026 from, from, you know, really the, the first three years of this bull market, uh, has been underneath the surface of the index we've had extraordinary dispersion, uh, of individual stock performance.

So if you're a stock picker, uh, which I grew up being and, and haven't really been able to do for the past 15, 17 years, uh, this is, uh, you know, Christmas.

And, um, there's lots and lots of things to do below, below the surface.

I mean, the investors you're talking to, do you find more of them interested in bargain hunting in the current environment or looking to put on protection or looking for safe haven places to hide in the current environment? What have your conversations with clients been like?

Is AI gonna replace Brad Hintz? [laughs]

[laughs] Um, so look, absolutely not.

Um, you know, what, what I can tell you is that, uh, like every other technology, I- we fundamentally believe that, uh, AI is an enabling tool.

It is an enabling tool for expertise.

Uh, while there are many things that we do that can be, uh, automated in terms of a process, that are repetitive, that require us to capture and intake information and summarize it, uh, the real beauty, uh, of expertise is creativity and interpretation.

And as far as I can tell, uh, at least thus far, my interactions with the technology, uh, is that we're far, far, far away from being able to rival-

-AI technology? And, and then over the last several weeks, it really hit a lot of these software companies.

Yeah.

Is that how you see it as well, that there needs to be some sort of retracement, that potentially these are the stocks that could trade sideways for months, if not a year, before the use cases grow into some of the valuations?

I- I- I'm in that camp.

Um, I know some of my compatriots at Morgan Stanley are not.

But, um, you know, what's built into the 2026 earnings forecast already is about another 130 basis points of margin expansion and productivity gains.

That is a lot, uh, of productivity gains in one year across an economy.

Uh, and so our best guess is that, you know, next year the earnings will be decent, uh, and decent to me is up 5 to 10%.

Uh, but things that, you know, border on 15 to 20% is a push, because it's a level of productivity that I just don't think the American workforce is ready to deliver, let alone embrace.

Can US stocks outperform if you don't have the AI names leading the charge?

Do you have any idea what's going on? I mean, who's buying this stuff?

So I don't know if we have an idea.

We have a hypothesis, right? So I know over the last couple of weeks, a lot of folks have talked about gold as maybe a hedge to some of the frothiness in the equity market, et cetera.

But we've really been on this extraordinary run for the past, quite frankly, three years since the bull market began in the fall of 2022 with gold massively outperforming stocks.

Yeah, wow.

And so one of the things that we've begun to think about is not just dollar debasement, but whether or not folks are really worried about fiat currencies more broadly around the world.

And as folks really truly think about whether or not there is a credible, reliable future for stablecoins and for crypto, whether some of this ecosystem needs to collateralize itself.

Is it odd to you? Does it feel frothy to you? How do you think about that?

Oh, wow.

... fiat currencies.

And so, one theory we have is that some of these players may be, uh, trying to build some reserves, uh, in the yellow metal.

Gold massively outperforming stocks.

I wanted to go there because this is not the correlation that we're accustomed to, and as we talk about kind of the uniqueness of this moment, perhaps the weirdness of- of this moment, what does that tell you? How does that kind of shape the way that you're looking at these markets? Well, it really requires some- some creativity, because a lot, to your point, all of these correlations are breaking down.

Uh, and so one of the hypotheses that we have is that, um, you know, we've got this scenario where, yes, we haven't seen inflation in the real economy, but perhaps we're really starting to see inflation in financial assets.

Just too much liquidity from everywhere around the world, sloshing around, looking for places to go, uh, and it, in- in the everything rally, uh, you know, we're seeing, you know, folks buy, you know, everything from- from gold, to stocks, to bonds, uh, to currencies.

"Bull markets are meant to be ridden, not timed." (laughs) That's very good.

She looked out to next year.

I will, you know, be very clear.

You know, um, our chief US equity strategist, Mike Wilson, um, believes that, that we are gonna see this positive operating leverage in 2026 and that those numbers are secure.

Um, he and I disagree, and on this point, uh, and I believe that the margins that are baked into the earnings estimates next year, which call for 13, 14% year over year growth, which by our guesstimates are about 140 basis points of expansion from where we are, um, are gonna be really hard to deliver, especially when the full effects of tariffs-

Yep (laughs).

Um, and if it's not the consumer, and the US consumer has been very clear that they're willing to, to push back, uh, and reallocate their spending away from higher prices, um, I, I think we're gonna see some companies in some sectors having to admit that they're absorbing it.

How many times have we asked this question? Was it all just a bad dream? Can we just move on?

Uh, so, look, I think investors right now are weary and wanna move on, they wanna look through it, um, but I do think that things have fundamentally changed, uh, from the NASDAQ peak back on December 16th.

Uh, I think the first thing that, that has changed is it's really clear that top-line growth among the Mag 7 is decelerating, and growth investors typically don't like to see deceleration.

The second thing is we're seeing this arms war, uh, with regard to CapEx spending continuing.

Uh, if we...

Uh, our latest update on looking at free cash flow yields shows, uh, Mag 7 free cash flow yields shrinking, uh, by about 11%.

Typically, these stocks don't tend to do particularly well when their free cash flow yield is, is coming down.

What risks do you want a premium to be paid for? And this sounds sort of existential, but it goes to the heart of the question of is it inflation or is it recession or is it both?