NVDA, AVGO & MU Show AI Strength as Earnings Take Center Stage

SPEAKER_1 (0:00)

Joining me now to discuss investment themes, though, for the fourth quarter, Mike Dickson, Head of Research and Quantitative Strategies over at Horizon. Mike, thanks so much for joining us today. So obviously we say happy birthday to this bull market that turns four now.

We're at what? Almost 120% since October the 12th, 2022 Yields and oil haven't managed to spoil the party just yet, but if you've made a lot of money in that time, maybe if you haven't, you're probably wondering what comes next. So what are you and the folks over at Horizon looking at at the moment?

Mike Dickson (0:34)

Hey, and thanks for having me.

And you're right, it has been a wonderful bull market. I think when you look at the start of this year, you'd be hard pressed to put 15% on the S&P with knowing that we were going to have yields rise as much as they have. You're going to have oil around 100 You're going to have the Fed expectations go from two cuts to three hikes and obviously a strong dollar. The macro environment has not been very favorable, yet equities continue to grind higher. And I think that's the real story is earnings remain in the driver's seat. And of course, we kick off with the banks this week and we're really going to be wanting to see just continued a broad breadth of participation in earnings growth. We have seen those trends thus far this year. Earnings have been excellent and rising yields though, while they seem very justified, it's not driven from inflation expectations. That does not make them irrelevant, right? And so there have been some areas of the market that have felt the pressure more than others. And that just creates a really selective environment as we head in here to earnings season and listen to what company management has to say.

SPEAKER_1 (1:41)

Right, so we're going to start to get a corporate read tomorrow, by the way, of the banks. I want to talk about that obviously becoming the next big catalyst because there are expectations of what, 30% EPS growth this quarter. I'm just wondering, when you talk about the composition of that growth, if you've been in technology or energy this year, you've done very well for yourself. But are we going to see broad breadth in these earnings? Because we seem to have lost that. We've seen that dramatic deterioration under the surface.

I'm just wondering that's going to start to show up in these reports.

Mike Dickson (2:16)

Well, when it comes to deterioration, I mean, one metric that I think you can point to, just the concept of market breadth. And over the last six weeks, or really two months rather, you have seen market breadth deteriorate a good bit, meaning whether it's the number of stocks making new highs, the number of stocks trading over a particular moving average. However, you want to measure it, they all do point in the same direction that less stocks have been participating, even as the S&P and other markets continue to make new highs. However, when you look back at the prior earning seasons and the trends that we've seen this year, we have continued to see broad-brace earnings breadth. And so I actually think that creates an interesting opportunity as we head in here to earning seasons starting tomorrow, because for a large number of stocks, they are no longer trading up near highs, yet we haven't gotten a whole lot of new information on earnings. That's about what we're about to get here over the next several weeks. And so that could make for an interesting opportunity for some of those depressed prices to really catch up and see that price broadening out, which has been under pressure.

And the earnings trends, at least from the prior seasons, have and continue to be very, very strong.

SPEAKER_1 (3:29)

Yeah, and they have been catalysts for a broadening out trade, which we've seen. But as you mentioned, I mean, we've gone back to the Mag 7 reestablishing the leadership and sort of that narrow, very tight, you know, concentration risk in this market.

What about yields? You know, particularly if people are saying that they're so strongly correlated right now to cracks beds to what refiners are doing right now, which are like off the charts compared to some of the AI stocks. I mean, can stocks co-exist with higher yields?

Mike Dickson (4:06)

I absolutely think they have. And we have some really good historical precedent for that, you know, particularly the 90s, where the 10-year yield averaged about 6.5 percent over that decade, ranging between roughly 5 and 8 percent for a large majority of that time. And that was a period that saw, of course, extremely strong stock market returns, and also a very strong returns from the bond market. And our equities don't need low yields to do well. Now, there is a level of yields where that starts to become an issue, and it's hard to pinpoint exactly, you know, if we speak and you'd be likely to think anything up over 7 percent is going to be a problem, at least historically, that has pressured valuations. But we're not near that at this point. And most importantly, I think when you look at the yields story, inflation expectations have remained very well anchored. And so real yields have been the driver of the increase in yields. Over 90 percent of the move that we've seen this year kind of across the curve.