Are Corporate Earnings in a Bubble? This Quarter Is a Test

**SPEAKER_1** (0:00)
As companies move beyond experimenting with AI and testing proofs of concept, they often struggle with how to effectively scale it. At the break, join Nigel Vaz, CEO of enterprise AI technology company, Publicist Sapient, who explains how companies can overcome the common execution challenges of AI to create meaningful business value.

**Telis Demos** (0:21)
Hi, Miriam.

**Miriam Gottfried** (0:22)
Hi, Telis.

**Telis Demos** (0:23)
So, we've got an episode about earnings.
Earnings are happening this quarter, which should not be news to people. They happen like clockwork, four times a year, every quarter. So, on the one hand, you're like, why are these guys talking about earnings? What are we really going to learn? But I think this is actually a really, really interesting quarter to look at this because earnings growth has been extraordinary. Outside of periods where we are recovering from something horrible happening, and so earnings growth is really high because we're coming off of a low base.

**Miriam Gottfried** (0:55)
We're coming out of a low base, right?

**Telis Demos** (0:56)
Talking about COVID, talking about the 2008 financial crisis. Earnings are growing at a level, or expected to grow at a level, that you associate with those periods, but we're not coming out of some immediate crisis. So what's going on? Are companies really just becoming dramatically more profitable right before our eyes?
Or are, and here's a term that people have started using, are we in an earnings bubble? We're used to talking about bubbles being like the prices are too high, and maybe the earnings are too high. And we're going to bring back a guest that we've had before in this show, and she was terrific, Christine Short. She's the head of research at Wall Street Horizon, which is a TMX company. And we're going to talk through some of the question marks around the corporate earnings trend that has really been a huge driver of the market. But before we get to that, let's talk about a couple of things that are really on our, specifically on our radar, that I think the market will be very reactive to this upcoming week on the earnings calendar. And one of those, I think, has got to be TSMC, the Taiwan Semiconductor Giant.

**Miriam Gottfried** (2:01)
Yeah, everyone is, as we've talked about, obsessed with semiconductors right now. We're seeing a huge inflection in their profitability. They're all reporting massive increases in profitability because they have so much pricing power right now, because there's a shortage of these semiconductors, and they're all needed to power the AI revolution.

**Telis Demos** (2:22)
There was an incredible chart from Bank of America that talked about— I saw that! Yes. What did it call? It called it a generational transfer. We usually talk about the generational wealth transfer of, like, boomers to to millennials or whatever, but this was a generational wealth transfer or cash flow transfer from hyperscalar companies, that is your Metas and Alphabets and Amazons of the world, to semiconductor companies.
And so basically, you know, they're spending all their money buying chips from these guys. And so you see this chart where it's like one line is like free cash flow like this, and the other line is free cash flow like that.

**Miriam Gottfried** (2:57)
Yeah. For those of you who can't see Telis' gestures, one is pointing way up in the air and the other one is pointing straight down. But prior to that, of course, the situation had been reversed, right? Because the hyperscalers were generating all of this free cash flow and the semiconductor manufacturers, as we've talked about, had been in a much more volatile situation where they were sort of operating at the behest of hyperscalers as opposed to being the ones with the pricing power.

**Telis Demos** (3:26)
Well, although as the market is a forward-looking mechanism, everyone knows this is happening. But where it's headed from here is, I think, a great uncertainty at this point. Because just watching the price action lately in semiconductors has been a bit wild. Because for all that we know that they're the incredible business they're doing. So Samsung recently reported earnings, and they were terrific. They were talking about record operating earnings and things like that. Well, they didn't report earnings. It was like a preview of what they...
Preliminary second quarter earnings.

**Miriam Gottfried** (3:58)
Something that Korean companies do, which I learned about, is they provide preliminary earnings and then they provided their audited results later in the quarter.

**Telis Demos** (4:05)
Now, you know.
But the market was like... The stock went down a ton.

**Miriam Gottfried** (4:11)
It was like an 1800 percent increase in profits, I think.

**Telis Demos** (4:15)