Equities, Bonds, and AI

SPEAKER_1 (0:02)

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Tom Keene (0:27)

What a wonderful time to speak to Alicia Levine, CIO BNY Wealth here who has enjoyed this bull market. How has this bull market changed over the last 12 months?

Alicia Levine (0:39)

Well, it's been a jarring 12 months. I think in the last two years, we came into the year expecting one thing. We got disruption. It's end of first quarter, early second quarter, and the market stabilized, and that echoed the first two years of this administration, and yet the market is fine.

Look, the market today is echoing the market from 2023 and some of 24, which was the top line index is being carried by a handful of names, and everybody's wringing their hands that it cannot continue, when in fact, it can continue. And if you simply own the S&P, you've been fine throughout all the policy discussions, the rate sell off, the hawkishness of the Fed, chaos in the European bond markets, and you've been just fine. And there's a very simple reason for that, which is that growth keeps on exceeding expectations as do earnings. And it seems very simple, but that has been a very resilient place to be. So the question for us now is, where do we go with all this? We're back to 15 stocks, you know, driving the market higher. Very interestingly, it, you know, the semis and software are rallying together. The Mag 7 are rallying. You've seen something of a seesaw, you know, when semis have been moving better, the software is down and vice versa.

And so what you're seeing is growth is winning. In a market where rates are higher, and it's very hard for the market to price in the Fed reaction function, but we assume higher for longer, that essentially investors are going back to growth.

Paul Sweeney (2:25)

But is growth winning because companies are spending ridiculous amounts of money on AI? Because not even the growth story is diversified, or there's no breath in the growth story.

Alicia Levine (2:34)

There's no breath in the growth story. Look, there's competition for capital.

We have news out of this morning about, you know, raising new capital for a company that just went public. What are you doing with all the cash that you raised? But, you know, in the end, there's demand for it. And as we know, and we've had this conversation about deficits, if there's demand for the debt, it's fine. Like the dollar amount is eye-popping. But if there's demand, then you can place it and so move on next. And that's kind of where the market is. Now, is there a price at which that doesn't happen? But we think the tenure can easily get to five and a half. That works with the nominal growth at 6.2, 6.3 percent. That's kind of a boom out there in the industrial economy. You see it in wages. You see it just on the manufacturing. The line's straight up.

And that's what's causing the long, you know, the tenure to move higher, really.

Tom Keene (3:24)

Alicia Levine with this BNY Wealth here on the equity markets. A lot of discussion today across the show on the equity markets as I celebrate my essay of the year. I'm catching Alicia blind on this, which is okay because she's so good at the game. Rob or not, Cam Harvey and team out of Duke and out of research affiliates, this is for the CFA Institute. And what they basically say Alicia, which is Alicia Levine 101, is stop looking at expensive price ratios, GARP and the rest, and get back to fundamental analysis. And the distinction they have is down the income statement, don't go too far down. Look, this is like 19th century. Look at gross profit here. That's the heart of the AI matter.

Alicia Levine (4:11)

Correct.

Tom Keene (4:12)

Is these people, the Dario on Saturday Night Live folks, they're popping massive gross profit. We don't even understand the magnitude, do we, Professor Levine, of the gross profit.

Paul Sweeney (4:26)

She's looking at us like, duh, yeah.

SPEAKER_1 (4:29)

Yeah.

Alicia Levine (4:30)

So, I mean, look.

SPEAKER_1 (4:32)

Oh, Paul, I miss you so much.

Alicia Levine (4:35)

As they say at the University of Chicago, y'all. I mean, look, you know, like, let's keep it simple. Like, what is the engine here? The engine is gross. The engine is profit. Like, you go where the goodness is. The goodness is not just revenue generation, but massive profit generation because margins keep on moving higher. Look at the margin of the S&P over the last 20 years. We've been on a margin walk much higher. It's structural. It is not just what's happening to you.