Charlie McElligott on How Long the Stock Market Rally Can Go

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hey there, Odd Lots listeners, you are about to hear a very special episode of the podcast. This was recorded live at our June 26th event in New York. We were talking with Charlie McElligott. He is, of course, Managing Director and Cross Asset Macro Strategist for the Global Markets America's Business over at Nomura. We talked to him about volatility in the market. What else?

Joe Weisenthal (0:40)

Yep, it's been a kind of extraordinary couple of months with stocks basically at all time highs, despite so much going on in the world. What actually explains what's happening? Charlie does a pretty good job, so take a listen. Thank you so much, Charlie, for being here.

Charlie McElligott (0:55)

Awesome to be here. Awesome to see you guys.

Joe Weisenthal (0:56)

So I didn't actually see where the market closed today, but we're pretty close. Either we're at record highs or we're very close to it. I didn't actually see, but it's crazy to me, all that's happened in 2025, and we're sitting here at all time highs. It's not intuitive. You have to admit it's kind of weird.

Charlie McElligott (1:16)

I think the message, I'm trying to remember the last time I was with you guys, but probably the message I was communicating at that time was the fixation and kind of the dooming with the left-tail scenarios.

Joe Weisenthal (1:28)

Yeah.

Charlie McElligott (1:30)

And as so often is the case, when people are not incentivized to see the world burn, which might be debatable to some.

Joe Weisenthal (1:38)

Sure.

Charlie McElligott (1:39)

But when you start seeing, especially with regard to negotiating tactics and things like that, where you start getting that not quite as bad as feared scenario, oftentimes there's an impact certainly with the mechanical stuff that we so often talk about, and you really underprice the less bad outcome. And there's a mechanical impact, there's a lot of vol distribution stuff, and it creates second order impact, second order flows.

I think the most fascinating two points that I would say outside of the mechanical flows that we talk about and the volatility component of this is two things. I think back to 2022, where we had our first inflation driven macro bear case. We just started the tightening cycle. I think there was nine or 10 months in a row of inflation upside surprises with CPI. And the macro bear case for equities at that point was this earnings recession, where due to this price shock, it was going to impact consumption, top line sales go lower, and so on and so forth. What ended up happening is ironically because of the health of the consumer and tight employment with wages at 40-year highs, you ended up actually getting a dynamic where the corporate world operates on aggregate consumption. They operate in the nominal GDP world. And that inflation, perversely, for the bears, was the earnings catalyst. And all those folks got stopped out in 2023 There is an element of that still to this day right now as it relates to earnings, even though nominal GDP is in a different place to a certain extent, it's still kind of 5% ish. But the other point too is that as it relates to the CAPEX spending uncertainty story, right, if corporates don't know what they are supposed to do with their cash because of the kind of range of outcomes with regards to where these tariffs are going to end up, the sand in the gears of the global economy, well the thought was of course if corporates don't know what to be spending on and consumers are feeling that impact as well, you're going to get this eventual drag with regards to consumption, you're going to have corporates in a bad place. You either lose the top line sales because consumers are paying through the roof or you have to absorb those costs and your margins go lower. But what corporates have instead done have taken authorized buybacks to all time highs. So we're not spending on R&D, we're not spending on hiring or building that new plant, we're going to buy back more stock than ever before year to date. And that, if you look at corporate buyback flows as a source of demand for equities over the past 10, 15 year period, it's a magnitudes, six, seven, eight times magnitudes, largest source of demand. So you've had these two kind of unintuitive dynamics in the market that have actually kept us higher on top of all those kind of vol scaling things that we like to talk about.

Tracy Alloway (4:41)

So the other thing that's happened is people are back to actually selling vol. So basically betting that things will stay relatively calm. Why is that happening? It seems like a weird time to bet against volatility.