Earnings Wane Investor Fears Amid Treasury Yield Spikes, Warns of Further Rate Hikes

SPEAKER_1 (0:00)

Let's talk about these markets. Joining us now, very pleased to say, is Ahmed Reisgo, Chief Investment Officer at Insignio. Ahmed, always nice to see you. Happy Friday. Let's just kick things off with the market outlook here. I mean, obviously, we've seen a degree of resilience with the 10-year at 5%. I mean, obviously, we were looking at triple-digit oil. We're not far off that right now, but we still managed to hit all-time highs this week. What's been your assessment?

Ahmed Reisgo (0:29)

Look, I think the equity market is responding to the fact that higher rates, even the 10-year at this level, is not such a big deal because profit margins and earnings continue to grow and expand at such a historic rate. So that means that the stock market is able to absorb even higher rates because the earnings backdrop is so fundamentally strong and sound.

SPEAKER_1 (0:56)

Right, so the earnings sort of saved the day here. What have you made of the data that we've been getting this week? I mean, the S&P global flash PMIs with respect to what that had to tell us. And then obviously the consumer sentiment survey, we just got out in the last few minutes. I mean, how are you tying it all together as it pertains to what the Fed is dealing with right now?

Ahmed Reisgo (1:19)

Look, the PMIs came in strong. I don't think they necessarily came in as blowout numbers. And so what we're seeing is an economy that is growing at around 3%.

Now, if you go back 20 years, most people would say, wow, that's growing way above trend. That's an economy that could potentially be overheating. My response to that is I think there's a new trend level of growth that's higher. I think the US economy has stepped up its trend level of growth. So I think we're running at about trend. I think this is the new trend level of growth for the US economy, right around 3%. So I'm not as concerned that these strong numbers we're seeing are actually going to be leading to inflationary pressures down the line. I think the inflationary pressures that are going through the system right now are, first of all, one is obviously caused by the war in Iran, which is a shock. But the second is due to some of the, you know, all the purchases that are being made by companies in the AI capex cycle. And I don't think a few rate hikes from the Fed is going to necessarily tamper that. Obviously, it could get to a point where if the Fed hikes enough, it will dampen, it will raise the cost of capital so much that it won't make sense for these companies to do it. But with an ROI of, you know, 30 percent, we're pretty far away from the level of a cost of capital that would cause hyperscalers to say, hey, we're going to start pairing back this. That's how profitable these data centers have become.

SPEAKER_1 (2:45)

Right. And obviously, as you say, the earnings are sort of saving the day here, particularly when you look across technology. And to your point, I mean, it's the AI CapEx that's really driving this market, which is largely, arguably, very insensitive right now. Do you worry about the other part of the economy that isn't doing as well?

Ahmed Reisgo (3:04)

I do. I do. And I think it would be a mistake for the Fed to hike rates as much as the market is currently pricing in, precisely because of what you said. There's definitely a two-speed economy. The housing sector is in the doldrums. It's a frozen market. Wages aren't increasing at any, let's say, rate that would portend to potential inflationary problems down the line. The low-end consumer is not doing well, is being squeezed.

And to a certain degree, consumers have been saved by the booming stock market. There is the discernible wealth effect that is driving some consumption. So not all parts of the economy are on stable footing.

A prolonged rate hiking cycle would certainly cause us concerns that the Fed could potentially undercut the economy's needs from below it.

SPEAKER_1 (3:55)

Got any concerns about some of the delays, the pushback we're hearing around IPO pipelines? I mean, obviously with OpenAI, there was some talk of Anthropic as well, SB Energy. I know that that was more of a valuation concern rather than current market conditions. But just given what we heard with Oracle, this sort of odd force majeure take on the data centers yesterday, you just wonder if tying this all together, it's indicative of something greater?

Ahmed Reisgo (4:24)

Look, I think these are signs of a healthy market, to be quite honest, right?