Market and FX Moves

**SPEAKER_1** (0:02)
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**Paul Sweeney** (0:27)
Cam Dawson does his word doc for me. It's just for me.

**SPEAKER_1** (0:30)
Okay.

**Paul Sweeney** (0:30)
And the font size is like six. It's like six point.
It's like, you know, 14 years old in middle school when you can read the board from the back of the room. I can't read this note. Save me, Paul Sweeney.

**Tom Keene** (0:44)
Cam Dawson joins us here, CIO NewEdge Wealth here. Cam, what's the feel for earnings so far this year? We've had more than maybe two thirds of the S&P 500 reported.
Seems pretty solid. Is it solid enough?

**Cam Dawson** (0:57)
Of course it's solid enough. We're tracking at 47.4% earnings growth.

**SPEAKER_1** (1:02)
Is that real? It's not real.

**Cam Dawson** (1:05)
About 20 percentage points of that is coming from the paper gains from Amazon and Google. That sets up for a very interesting dynamic as we get into 27 because it's unlikely those will repeat. You still have the rest of the market growing at 28.8% earnings growth, which is absolutely incredible given the fact that it's not as if we're coming out of an earnings recession. The last couple of years were strong too.

**Tom Keene** (1:31)
Yeah. Is this revenue driven? Is it margin driven? What's going on?

**Stephanie Roth** (1:35)
This is stop, stop, stop, stop.

**Paul Sweeney** (1:38)
CFA Sweeney just nailed it folks. Where on the income statement is this happening?

**Cam Dawson** (1:45)
It's a really important point because yes, there is a big revenue component and that should not be a surprise because nominal GDP growth in the second quarter.

**Paul Sweeney** (1:54)
You know where I'm going. Continue.

**Cam Dawson** (1:55)
Well, it was 8%.
Remember, revenue is nominal. So they benefit from this world where prices are still going up. And the other dynamic that's happening is that yes, margins are expanding. They're up about 300 basis points on a net income margin overall for the S&P 500 Now, a good portion of that, about half of that is those paper gains again from Google and Amazon. And the other, the rest of that is actually coming from semiconductors. And not because of some kind of productivity boom, but we argue it's operating leverage. It's effectively you're growing revenues so much on a fixed cost business that margins are exploding for semiconductors.

**Paul Sweeney** (2:34)
As I just said to Robert Dahl, let me say the same thing to you is, well, if we assume it's someday our China-like nominal GDP ends, what's the analog here of what the stock market does is the nominal comes down? Do we have a history?

**Cam Dawson** (2:50)
Well, we do because we had a period of very strong nominal GDP growth in a year like 2021 and it certainly decelerated a bit in 2022 And so we saw some dynamic of that reflect within the overall market performance. But it raises the question of is this as good as it gets?
Second quarter earnings are so extraordinary. Is that going to be the peak for this cycle? And then the question is, does the market care? The market cares when you have a second derivative slowdown. So 47 turns into 30 turns into 20 and then eventually you go to negative. So that would be the concern is that if people see this as the peak and we descend from there, that could be a source of volatility for markets.

**Tom Keene** (3:37)
We're going to get SpaceX after the close and it's kind of been certainly a seminal event for the equity markets. The largest IPO of all time, monster valuation, trades up now, it's trading down.
Should the market pay attention to SpaceX and its earnings after the close today?

**Cam Dawson** (3:53)
I think we have to just because it is the sign of a potentially all clear if you have a good reaction to the earnings for some of these other big IPOs to come out. I mean SpaceX has been a story about the perils of high valuation.
When they IPOed at 85 times current price to sales, 60 times forward price to sales, even if those sales deliver, you are going to see you have to grow into that multiple. That's effectively what has happened. You see that price to sales ratio now fall to about 25 times price to sales. Effectively, you've reset the valuation. The question is, is it enough? 25 times would still be the third most expensive name in the S&P 500 if SpaceX was in the S&P 500, which it's not because it doesn't generate any profit.