The S&P 500 Is Only 50 Stocks. 70% of the Index Is in a Correction. Did the Sell-Off Already Happen?

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Jack Forehand (0:58)

Paisley, welcome to Excess Returns.

Paisley Nardini (1:01)

Thanks for having me on. Super excited. I've been listening to the show for quite some time now, so it's very exciting to be here live.

Justin Carbonneau (1:09)

It's awesome. Thank you so much. You are with Tema ETFs, which is a firm that runs a number of ETFs and investment strategies, focused on identifying and investing in some of the biggest structural trends shaping the market. I think we're going to talk about what some of those trends are today. But in addition to that, we want to talk with you about what you're seeing in the market, how AI is influencing your investment process, but also how you're thinking about AI, thematic investing, private markets, and basically a wide range of different topics that I think are going to be fun and exciting to work through with you today.

We always, when we have a guest like yourself on, we kind of like to start with the bigger picture. So when you look at the market today, where stocks are, where interest rates are, and sort of the competing forces in the market, how are you making sense of where we are in the market today?

Paisley Nardini (2:07)

Yeah, you guys chose to have me on as a guest at a very exciting, nerve wracking time in the markets. I think there's always something going on, but it does feel like the confluence of rate pressure, oil prices, calling into question the ROI on the AI trade broadly. All of this is coming to a head right around the midterms and right around when we typically, from like a seasonality perspective, see good tailwinds in the market. So it is making me pause. It's making me question, which I think, broadly speaking, it's a really good opportunity right now for investors to be reminded of the importance of like, what do you own? Why do you own it? What's the objective in a portfolio? But we can come back to that in a moment. So to your question, thinking about yields backing up and the expectation, of course, is that then that will pressure equities. We'll see a sell-off in equities.

What we've seen is actually a lot of resilience. And if we start to think about a big topic that's been thrown around the last few weeks, of course, is the deterioration in breadth, just meaning that we're not seeing a lot of the underlying constituents of the major indices, namely the S&P 500, going up in tandem. This rising tide lifts all boats that we've become accustomed to over the last couple of years is starting to break down. Part of this, if I want to have the silver lining, is that I appreciate that markets are starting to look through the headline and starting to really understand, how are these companies positioned? What are the supply chains look like? What is the growth trajectory? Is it sustainable? Because a lot of times, when we think about growth from an absolute perspective, companies can continue to see an earnings increase, revenue increase, but that growth, that trajectory might slow down. That's where I think we're at today. It's not to say that this is the top by any means. I actually am quite optimistic, but we are seeing a bit of a maybe deceleration in some of the trajectory of some of these companies. Going back to your question on why are rates not pressuring equities at the headline level, meaning the index level as much, it's because they're pressuring underneath the surface. The companies that are more exposed, of course, to external funding needs, which is going to be the smaller caps, the mid caps. The companies that just don't have as much free cash flow, are more capex intensive. All of these companies have really been penalized the last couple months. If you're an investor just looking at your statements, you're probably like, hey, it's not been a great quarter. Third quarter was meh at best.