Chapter 1: What does Denise Chisholm think about the AI capex bubble?
I saw a reel from Neil deGrasse Tyson on these being the closest thing we have to aliens. They have like nine hearts, a couple of brains.
I did not know that.
Well, that part I knew.
I remember that.
Each one of their tentacles can see, feel, touch, smell, taste.
I don't eat octopus.
Okay, you don't?
But I eat calamari, I eat squid.
Okay.
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Chapter 2: Why do stocks keep climbing despite skepticism?
I'm not really normally like this.
Yeah, that's okay.
So we know you can't do individual stocks. We can, so we'll do the talking. You do the talking. We'll do the talking. Yeah. So I know you can't confirm or deny, but it's public now. It's public. This just happened before we came on here. Anthropic, Series H. Where we go? Where is this? Series H, they're raising $65 billion at $965 billion post-mortem.
The round is being led by Altimeter Capital, Dragoneer, Green Oaks, and Sequoia. And listen to who's participating. Basically everybody. Capital Group, Co2, D1 Capital Partners, GIC, Iconic. Yeah, and Taylor too. And XN, AMP, AMP, PBC, Bally Gifford, Blackstone, Brookfield, D.E.
Shaw, DST Global, Fidelity Management and Research Company, General Catalyst, Insight Partners, Jane Street, Lightsheet Partners. I'm like halfway done. I'll stop reading, but holy shit.
With that amount of money, you need everybody. Basically.
65 billion.
It's like the last Avengers.
Yeah.
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Chapter 3: How is earnings growth broadening beyond the MAG 7?
Do tell. And get your response. All of this checks out with me. So, all right. Earnings growth powered by the AI boom will drive further gains in stocks. Okay, I think we're all experiencing that right now. We would all agree. Goldman is going to 8,000 from 7,600. Quote, continued earnings growth should drive continued equity market upside.
The increased return forecast reflects increased estimates for S&P earnings following an exceptionally strong first quarter reporting season. I also would point out their earnings per share forecast would equate to 24% year-over-year growth this year. and they're bumping up 27 to 13% growth.
The argument is there's a lot of beneficiaries of artificial intelligence infrastructure investment in the S&P. Maybe that was underappreciated in January, and we've all woken up to this. Last thing, the combination of decelerating earnings growth and continued uncertainty around both AI and the macroeconomic outlook should prevent a major increase in valuations.
So they're saying not a bubble, the governor is, there's still this uncertainty about AI. So the infrastructure powers the earnings, but the multiple stays in check because people are a little bit nervous about what is it all going to mean. Does that sound roughly in line with what you expect?
Yeah, well, I think that there's a lot of data that supports what they said and then an addition to that, which is to say that it is becoming more diffuse. it is becoming more broad in terms of the recovery. And you can measure it a bunch of different ways. And I think the interesting part about CapEx cycles is that you can measure them historically.
I mean, post the financial crisis, a lot of investors complained about the fact that corporate America wasn't spending, right? And that the earnings was fake-ish in the sense that it was driven by buybacks and dividends. And it wasn't real earnings. So you can measure it historically. Now we're starting to to complain, I would say, or to be concerned about CapEx.
But CapEx is usually the better path, right? So if you say CapEx relative to sales is on an upward trajectory, and that's, let's call that a CapEx recovery, and you could call the opposite something that's not, you would rather, as an investor, from a stock market perspective, from an earnings perspective, from a GDP perspective, and from a job perspective, rather have a CapEx recovery.
That CapEx recovery on the high end is definitely driven by CapEx seen in technology stocks, but it's getting more diffuse. So all of the sectors now of the 11 gig sectors, we have the data going back in history. You can measure it CapEx relative to sales. They're all accelerating and not to such a degree that we saw in any kind of bubble.
I mean, at the bubble time, when you measure it, especially relative to free cash flow at the peak of the bubble in 2000, Corporate America, in aggregate, was spending three and a half to four times their free cash flow at the time. We are still under one. in terms of free cashflow, even with- Outside of the hyperscalers. Even in addition to them, like so in the aggregate.
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Chapter 4: What role do semiconductors play in the current market?
But you think that's a real thing?
Well, I think the most interesting part is I think that most investors, and I think for people who study history, this is the exception, but most investors want the equity market to reflect good times and good diffuse times, meaning that not just a few companies are spending, but many companies are spending. There is good growth. There is good job growth.
But when you study history, the equity market doesn't always reflect good times. In fact, if you had to say, if you dropped a quant onto it, and I'm kind of a quant, And you said, is the equity market reflective of good times or is that a hedge against bad times? You'd almost say that it's more often the hedge against bad times.
I mean, think of all the things that have gone wrong over the last five years and the equity market is 70% higher. So this is the trick, I think, of investing that when you study history, like you understand all the risks, all the headlines, like all the problems that can go wrong and your downside risk is, well, what if they don't go wrong in the way that you think that they will?
then you give up on average returns of 8% a year, which is one of the few asset classes that can actually keep pace with inflation. So I think that's the tug of the riddle with equity investing.
I think there are investors also who politically are just on the other side of the administration. And that's, you know, perfectly fine. They'll have their time in the sun someday too, we assume, like it goes back and forth.
Oh, it always goes back and forth.
But there are people that when they don't like the direction the country seems to be headed in, they don't like who's in the White House, or they disagree with the way like certain things are happening in the culture. It's like a cognitive dissonance that they almost can't bear. They can't process why is the stock market higher? Isn't A so bad and B so bad and C so bad?
Surely this is wrong because I don't feel good right now about what I'm seeing.
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Chapter 5: How does inflation impact corporate margins?
That would have been scary. Well, that's exactly. So when people say like, what could be the problem? Something like that. Where you see very little fear in the equity market or a bubble like that in terms of that price advance or something like that looks more like that. And good economic times, top quartile, you know, GDP growth, which we're still grinding it out at like two, two and a half.
And we'll see where earnings growth ends up. But, you know, for the most part, it's been between 10 and 15.
So don't you think it's easy to make the case that investors as a whole are being sober right now, even though we're about to get to some of the crazy shit that's happening because there is obviously crazy shit happening. But I've said this to Josh a million times. In today's modern digital markets, in a bull market, there will always be maniacal behavior.
Like that's just, that will never not happen again. And sideshows.
Yeah, of course.
But in the aggregate, the fact that we are not outpacing earnings growth, I think the market is being pretty sober. Completely agree. All right. So rewind back to, I guess, earlier in the year. I don't know when we made this chart, but remember the forward PE of tech? Next chart, please, Daniel. And the forward PE of the S&P 500 converged.
Yep.
Yeah, yeah. And we were like, is this good? Is this bad? This seems weird. All right. Well, that was the fat pitch.
Yep.
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Chapter 6: What is the significance of Fed policy on market dynamics?
Eight out of 10. If it's kids, it's 10 out of 10. And that's wheels. So a little bit TikTok, but a lot of wheels. And they've used AI to essentially rewire our brains. We can't stand on an elevator and not look down at the phone, right? It's captivated. So AI has enabled just an incredible step change in how addictive meta is and how good they are at serving ads, most importantly.
Right, which is how they generate ROI.
So the biggest beneficiary of all this spend in the market today and the area where if somebody said, Michael, what do you mean the market is sober? Have you not looked at semiconductors? Yeah. Okay, fine, point taken. So chart three, Daniel, please. The SOX index-
is 69% above its 200-day moving average, which is unlike anything going back to... So I guess we only have data going back to 2002 here. Okay. But we've never seen anything in the last 25 years like this. It is going straight up. We spoke... Josh and I were talking about Micron, how it just joined the Trillion Dollar Club. It's the 11th stock, and I guess Anthropic is on its way.
So on Tuesday, UBS raised its price target for Micron to $1,625 from $535, more than double its closing price on Friday of $751.
Without commenting specifically on Micron.
Mm-hmm.
you would agree this recent development of these memory stocks and Korean stock market and- All related. Some semiconductors that Denise is not specifically talking about, you would agree this is an area that's causing portfolio managers and market watchers to be like-
Wait a minute, what's going on?
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Chapter 7: Why are mega-IPOs creating market concern?
I'm not, like, calling a top mic on or anything like that, but, like, when something goes up 5% a day, set some sort of exit plan just while you're sober. And maybe he's drunk on the gains. But, like, because if and when this thing falls, it's just going to be disorienting for your brain. Like, I'm not making a short-term call, but just having this conversation with him.
It won't fall 5% a day. It'll fall 20% a week.
Well, it just fell 30% after earnings. It just did. So anyway, the point is this. He said, well, it's sold out for a year. Is it still a cyclical business? And I would say, yes, but you know a lot more about this than I do.
Well, I would say, so the trick with cyclical businesses, if they're cheap, that could be the peak in earnings. So that's to your point. If this is still a cyclical business, then valuation doesn't Doesn't look from a probability perspective the way it currently looks for semiconductors, meaning that I have this linear relationship.
The cheaper the stocks are right now over the last 10 years, the more likely the stocks are to outperform. Right. So I think some of what we're seeing right now is a changing business. Right. We just talked about that in terms of earnings. They've never compounded like this. Now, whether or not like earnings is a peak, that part, I don't know.
But what I can say is that the valuation compression that we just saw, again, that two year stack in terms of the earnings growth, it's almost like a catch up trade. And some of this valuation multiple is saying, look, I understand that there's a lot of fear in the market about what this might mean. Some of that's in the stocks. Right.
Which seems absurd to your point, like back to the point of like, yeah, there's fear in the stock. It's only it's only eight X. Exactly. So, again, it's sort of you have to sort of put the case of, yes, anything that goes up that much can also go down. But when you think about measuring fear quantitatively and measuring valuation support, there's 70 percent odds or not 100 percent odds.
But when you see a pattern like that, I think you have to be a little bit more open minded that price might be understanding something that you don't.
What's that 70 percent that you just mentioned?
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Chapter 8: What insights can be drawn from historical market cycles?
That's a good question. Do we need drive? Do we need that as the driver?
Well, the people who are long right now don't need that. They're fine.
What are the areas of the market where there might be too much enthusiasm? And this is hard to say what's priced in or not, but it might be the analysts. So this is from BC Alpha Research. They grabbed this data from FactSet. We're looking at net profit margin for every sector. And they're expected— I mean, they're at all-time highs, and they're expecting even more gains.
Yeah.
What happens if this doesn't come to fruition? I think you keep saying like the diffusion and the breadth of companies benefiting from this. Do you think that this is more likely than not that margins are going to keep going up? Because this to me is the, this is it. This is the whole game.
Right. Yeah. So I would say, well, let's look at the forward indicators in terms of what's correlated to margins. And the biggest correlation to margins is unit labor costs. So labor, especially when you sort of compound it for productivity is
that's, you know, corporate America's biggest, for the most part, cost, which is not to say that there's not other input costs, but that's the main, I would say that the main corollary. And so when you look at, you know, labor costs over time. Every sector? Yeah. So most sectors, the vast majority of sectors, and then when you aggregate it up for the market overall, Without a doubt.
So I think you have this unique combination of unit labor costs are in the bottom quartile of history. Right. So that is very rare relative to like, you know, three percent inflation. So it's partly because wage pressure has been, you know, continued, I would say, with, you know, in conjunction with productivity advancements. So that has the correlation to profit margins.
So the lower unit labor costs have been direct relationship. The higher corporate profit margins usually are.
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