Liz Ann Sonders on "Casino-Like" Market, SPX Growth Concentration, CPI & PPI Preview

SPEAKER_1 (0:00)

Welcome back to Morning Trade Live. It's time now for the big picture. Let's welcome in Liz Ann Saunders, Chief Investment Strategist, Schwab Center for Financial Research. Good morning, Liz Ann. A very busy morning here. I do want to kick things off just with something different. What Hock Tan over at Broadcom has had to say. I mean, the fact that he's suggesting that this is a casino-like market with regards to the AI trade, suggesting that traders have little understanding of what they're actually betting on. I defer to you because you have spent a great deal of time this year and you and I have spoken about it extensively, about the casino-like nature of this market. What have you made of that?

Do you believe what we're seeing in semis is justified? Does the sell-off make sense to you?

Liz Ann Sonders (0:45)

I think it's a combination of maybe a gambling mentality on the part of certain traders both on the individual investor side and into the institutional sphere. But some of it may just be the fact that a lot of these, whether it's the systematic funds or the long short hedge funds, the commodity trading advisors, they have really tiny time horizons and they're playing off of each other's positioning. Once you kick in the latest rotation trade, that can develop a little bit of a life of its own.

I think some of it's just the nature of the high-frequency trading community, but you could also argue that there's that sort of gambling very short-term, looking for the big win opportunity.

SPEAKER_1 (1:32)

Okay, understood. What have you made of the earnings so far? Obviously, we're dealing with the banks this morning trying to digest that. We've already seen a lot of flip-flopping going on in this market. Have they indicated anything about what we're likely to hear for the rest of the reporting season?

Liz Ann Sonders (1:48)

Well, in general, we're hearing that the consumer is in okay shape, but we are seeing pressures down the income spectrum into the subprime category.

Also, generally weaker FIC data, fixed income trading, commodities, currencies, maybe no big surprise there, but a bit of an offset with net interest margins. So we're still very, very early in the season. Expectations are high. What I'm looking for, not just among the financials, but more broadly, and you can only infer this, is how wide is the spread between the sell-side consensus that is published, and the buy-side expectation? That's the unpublished, what we maybe used to call the whisper number. I think reaction on the day by stocks of companies that have just reported, may give you a sense of whether there's a wide gap between those two expectations or something a bit narrower.

SPEAKER_1 (2:46)

And what about the widening gap and the narrowness of the strength of the earnings? I mean, you know, particularly because we've seen how concentrated this market and this rally has been, particularly in recent weeks. I mean, do you think we continue to see that playing out in the composition of the strong strength of the EPS this quarter?

Liz Ann Sonders (3:06)

Yeah. So, you know, there is some breadth that you can point to in terms of the sectors that have rising estimates, whether it's for the third quarter that we're just starting the reporting season for or the full year. And we're starting to see a little bit less concentration in the market, given that we've started to see a little bit of a broadening out over the last several trading days, not suggesting that's yet a trend. But there is still significant concentration in earnings. So the expectation for about 35% earnings growth, not for this quarter, but for calendar year 2026

18% of that is Nvidia and another 14% is Micron. So that's one third of earnings growth comes from two stocks. If you take it out to the 10 largest earners, which aren't all mega cap tech stocks, Exxon and Chevron have worked their way into the top 10 earners for very obvious reasons. You look at the top 10 earners, they account for about two thirds of S&P earnings growth. So there is breadth, but the sort of magnitude of the earnings increase is heavily concentrated in only a few names.

SPEAKER_1 (4:14)

Yeah, and I guess the big question is just how sustainable it is, because to your point, I mean, obviously we have seen improving participation over the last week. That is encouraging. No doubt getting some reprieve from yields backing off from those levels we had been looking at. I guess the next big catalyst is going to be that inflation print, Liz Ann. The CPI was speaking to your team, Colin Martin yesterday, who said it would have to be a pretty hot print tomorrow to, I guess, then raise those rate hiking bets for October. What metrics are you going to be looking at for this particular data print?