From Bank Earnings to AI Power: Where the Market Goes Next

Marley (0:00)

I do want to welcome in our next guest though, joining us, Kim Arthur, the CEO and CIO of Main Management. Kim, thank you for being with us on this Tuesday morning. Now, you are looking for earnings growth of about 23% year over year in the third quarter, with companies typically beating a bit more than that as well. How much confidence do you have in that outlook now that we've heard from the big banks and we did see a rare miss from one of them?

Kim Arthur (0:25)

Marley, thank you very much for having Main Management here today. Yeah, we did see a miss from JPMorgan, but we saw a beat pretty healthily from Goldman Sachs. You also saw with JPMorgan that their net interest margins, they guided up. So I think there are some idiosyncratic pieces for it. I do think the other thing to keep in mind is Wells Fargo who also talked about the consumer, and the consumer they said is resilient.

So we're pretty confident in these up 23 percent forecasted, and typically the last quarters you've seen about a seven point beat above that. So it could be as high as 30 percent.

Marley (1:09)

You make an argument that earnings growth is really being supported by actual consumer spending and you mentioned Wells Fargo mentioning the consumer today. Real consumption growth expected to moderate from 3.8 percent in the second quarter down to 3.4 percent in the third quarter.

Do you still view the consumer as being strong enough to sustain corporate earnings at these levels? I was just talking about Domino's Pizza, which certainly isn't the best view at the consumer, but still seeing difficulty there, still seeing people pull away from the traditional pizza night and really trimming where they're spending.

Kim Arthur (1:46)

Yeah, that's a great question. That consumption that you talked about that's supposed to be up 3.4 percent is being driven by after-tax wages and salaries that for the low end are running up 4.5 percent, and for the mid and high end, they're running up 3.8 and 3.7 percent respectively. So that's the fuel that you're getting to help drive that consumption. So we still feel that there is pretty good tailwind. The other piece too, Marlee, is that this accumulated net worth of 186 trillion of which the baby boomers and the silent generation have a 100 trillion dollars, that is another powerful force driving the consumption.

Marley (2:37)

I was looking at some of the card spending data that we got for the month of September. We have seen pretty much increases across the entirety of the economy, across the whole K or the G or whatever letter we want to call it. Are you viewing that? How much are you viewing this uptick that we're seeing, particularly for lower income houses? I think they were about five and a half percent more than any other group in the K.

Are you viewing that as genuine financial improvement or are you looking at that more as just that I have to spend more to live the way I did last year?

Kim Arthur (3:14)

Yeah, I think again, underpinning that is those after tax salaries and wages that we mentioned that are four and a half percent for the low-end income households. So they do have a driver that's helping them out and so I think it is a lot more sustainable. People talk about the labor market being kind of mad, but if you look, AI is producing new jobs, not destroying new jobs, and there's probably we're at the inflection point where some of those wages and salaries might actually being able to get some pay raises coming through. Then again, I like to facetiously say that because of COVID, the baby boomers went from I'm going to save all my money and then pass it on generationally to I'm going to spend until hopefully my last check bounces.

Marley (4:04)

I mean, they earned it, so they should be able to get to do whatever they want with it. But let's talk about some of the sectors and how you're looking at them. We talked briefly about financials off the top, but I didn't address with you how you're looking at interest rates. If we are seeing them higher for longer, can we still support banking revenues at the levels that they are right now as we have increased funding costs, increased credit risk, and also how are you looking at regionals with this higher rate environment?

Kim Arthur (4:34)

Yeah, I think that interest rates we think it probably topped here. The utilities are usually pretty good at sniffing out the tops and rates, and they bottomed on the 30th of September. So we do think that we're sort of, these are not higher for longer, they're normal for longer, and that you're going to see the 10-year, it's going to kind of live around 5 percent because the economy is so strong. So I do think the Fed will probably raise rates one or two times more over the next six to 12 months, but those are more of insurance moves up. And then I think that the groups that are going to, I mean, I look at the S&P profit margins are at all-time highs in spite of these high rates, in spite of high oil, in spite of tariffs, in spite of AI inflation. These CEOs have done a phenomenal job at kind of navigating these difficult trends that are out there.