Kevin Gordon, Head of Macro Research and Strategy, Charles Schwab, Talks May Jobs

**SPEAKER_1** (0:02)
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**Tom Keene** (0:07)
In a studio right now with equity perspective on this, summing in the total market, working with Lizanne Saunders is Kevin Gordon here. What's the chart you put together this morning? I want to get out front of the Kevin Gordon tweet. What's on your mind?

**Kevin Gordon** (0:20)
Well, for the equity market, what's been on our mind, and this was sort of central to the equity component of our mid-year outlook that we just published, is this divergence that you're seeing in breadth. The fact that the average stock, when you look at the percentage of companies above their 200-day moving average, when you look at percentage of companies outperforming the S&P 500 on a rolling three-month basis, that's remained pretty weak because you've gone through another bout of AI hype especially within the semiconductors. So that in and of itself is not a horrible omen for the market. We've seen it actually resolve itself, those divergences resolve themselves in a positive way over the past couple of years when they have happened.

**Tom Keene** (0:57)
Yeah, even in the past three days. When I got the Dow moving up, but I see some of the mutual funds giving me better returns than Broadcom.

**Kevin Gordon** (1:05)
Yes.

**Tom Keene** (1:06)
There's something going on out there, isn't there?

**Kevin Gordon** (1:08)
Yeah. I will say the new norm, the last time that you actually saw a lower percentage of that metric I mentioned, the percentage of companies that are outperforming the index on a rolling three-month basis, the last time you saw a lower percentage, so sub 23 percent was 23 and 24 Before that, you have to go back to 1973 So of course, very different market backdrop, 73, the start of a horrible bear market, 23 and 24, more consistent with corrections. So it is more of the norm these days, given the concentrated market.

**Tom Keene** (1:35)
Well, let's just say future is negative 50 right now.

**Paul Sweeney** (1:38)
Kevin, we're in a time here, very active equity new issuance in the marketplace. We had this monster mega deal from Google this week from Alphabet.
The market took it in seemingly very well. Then of course, we've got all these IPOs that are to it up SpaceX on the road as we speak. Then maybe some of these AI plays, huge transactions. What does that tell you about this market here? How do you guys think about it?

**Kevin Gordon** (2:02)
So I think it does underscore of course, that the sentiment environment is certainly getting frothier.
Whether you think of it as frothy or not, I think that's always just kind of up for whoever's whatever the person's perspective is. I will say, I've been traveling the past four weeks, almost nonstop all over the country, also in Korea. But in the US, when I've been speaking with our investors, there's actually been a sort of a elevated degree of skittishness or hesitation around just the environment of mega cap IPOs in general. So the attitudinal sentiment is not necessarily matching up with the behavioral sentiment that we've been seeing in terms of really stretch fund flows and how much has been going into tech and how well semis have been doing. So to me, that sort of lays the framework, I think, or the groundwork for maybe a little bit more room for sentiment to get stretched to the upside. Of course, I think the game will change a little bit after we do get a lot of these companies coming online into public markets, but I haven't yet felt at least that on the attitudinal side, there's been a lot of that hype that has matched what we've been seeing with people, what they've been doing with their actual dollars.

**Paul Sweeney** (3:07)
I guess if you want to take the bullish side here, which is probably the right way to be, earnings have been there. Earnings have supported this market, it seems like, and how do you think about that going forward?

**Kevin Gordon** (3:17)
I think, of course, the breadth of earnings is actually, you just want to look at the number of industries that are seeing their earnings grow. Yes, the breadth is there. Of course, the magnitude in terms of concentration, it is a little bit more skewed towards the large caps and the mega caps.
I do take the optimistic side and angle of that, where if you look over the past several decades, the growth in that earnings share for that cohort has grown, so it's not like it's been totally unjustified. But on the flip side, you do have more reliance on a smaller share of companies. So to the extent that they can't keep up with expectations or to the extent there is a disappointing quarter, a series of quarters where capex estimates for some reason have to come down, earnings estimates get revised lower, of course you always run the risk. But that's why we make the case for diversification within the equity market because you've been able to, that's been the best way to play this, especially with even a sector like health care over the past couple of weeks.