The Big Macro Force That's Been Driving Stocks Higher for Years
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What is the main topic discussed in this episode?
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Hello and welcome to another episode of the Oddlots Podcast. I'm Joe Weisenthal.
And I'm Tracy Alloway.
So, Tracy, one of the things that we've been talking about a fair amount, everyone's talking about it, I guess, is how the biggest most profitable companies in America, they're still really big and they're still really profitable, but they've switched from being throwing off tons of free cash flow to big investors spending a lot of money.
Yeah, that's right. So we've had years and years and years of big tech basically. I guess generating infinite amounts of cash, it feels like. Uh and now they're switching to actually spending some of that cash to build very expensive data centers and things like that. And you're right, it is kind of a change for the market, right? Like we haven't seen that scale of investment for a very long time. Certainly not I don't think in our lifetimes, have we?
I don't know. No, I it doesn't feel like it. I mean You know, I guess maybe we'll get into this in the conversation. You know, I think if you go back to like pre GFC era, when a lot of the really big companies in the index were like you know, Exxon was the biggest company in the world for a long time. So they would have always been having to like spend because you can't just sort of like passively collect oil, et cetera. But It does seem generally true that the big theme both with financials and tech is this incredible ability to generate huge returns with fairly modest capital outlays, whether we're talking about equipment, plants, or even human labor.
Well, the other big switch is just, you know, if you look at it just uh at the tech sector basically, which has been, you know, the dominant force in our equity markets for a while now. But for much of the two thousands, the investment was in sort of like intangible, you know, SAS type stuff. And now we're switching to really like brick and mortar. They're paying to build energy capacity and they're paying for actual chips and actual actual buildings to house a bunch of air conditioners and servers and all of that. But it's an old.
No, it's it's totally true. This is uh the big theme, right, is just this. So the question is like, okay, they're still making a ton of money, they're still very profitable. And maybe these these investments will pay off in a massive way at some point down the future. But can investors expect the same level of returns that they've seen in the past if there's this big switch in terms of strategic decision making in terms of capital outlays and so forth, taking on debt. What does this mean for the markets? What does this mean for investors? And I don't know the answer, but maybe our guest uh
Well, also, I mean, you and I, I think for the past twenty years we have all gotten very used to everyone saying that the tech sector is overvalued. Right. Like even as it throws off infinite amounts of cash, everyone is like, Oh, so overvalued. The market's at a top, the market's at a top. That has been the case for pretty much like my entire mature investing age lifetime.
Right. And so you bring up a really another important dimension of this, which is just that valuations. By traditional metrics I mean, I remember, you know, early on what was k the Schiller the Schiller Cape ratio. And there's like, no, it it's like this has got a mean revert. It's this is we're at the ninety eighth percentile of historical valuations and it keeps going up and so
mean reversion is always around the corner, Joe.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:00–3:59
2
Why are U.S. stock valuations so high despite rising earnings?
3:59–8:39
3
How does free‑cash‑flow valuation differ from price‑to‑earnings ratios?
8:39–15:10
4
What does the decline in labor’s share of profits imply for valuations?
15:10–20:32
5
Why are big tech firms shifting from cash generation to massive cap‑ex on AI?
20:32–31:19
6
How does the paper explain the persistence of high market multiples?
31:19–38:07
Speakers
6 identifiedMore from Odd Lots
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