When Will Bonds Start Competing With Stocks Again?

SPEAKER_1 (0:00)

Let's bring Marlee back in, turn our attention to the factors that are driving this market with Paisley Nardini, who's the head of investment strategy over at Tema ETFs. Paisley, thank you so much for your time. I love how you've characterized this bifurcated market, because that's how I've been sort of looking at things over the last few weeks or so, particularly because I've been taking a look at what's been happening with the macro environment over in Europe and just how contained the contagion risk has been from that, where you've still had US tech stocks pushing these all time highs, when you've got political uncertainty in another part of the world. It's fascinating to me, but we have been talking about that dramatic deterioration, as you highlight in your notes under the surface here.

Are you encouraged at all by some of the improving participation we've seen in recent sessions?

Paisley Nardini (0:49)

Well, thanks for having me. Hopefully at this point, it's not a surprise to anyone that it is a very bifurcated market as we talk about today.

Just to share some stats, as the S&P and the broad US equity market is hitting all-time highs, 70% of the underlying constituents within that index are trading below their 50-day average. As you say, some of this might be starting to show a little bit more resiliency, but this theme really took hold in the middle of the summer. We look at it as the tail of two halves, really. In the first half, we had this rally in more of the unprofitable smaller cap securities. Then as we're looking at the back half of the year, and you just highlighted this, the MAG7 is starting to take hold again. We're going to be getting a lot of these earnings later this month, around the same time as the midterms, which is also coincidentally around the same time as the next FOMC meeting. I anticipate quite a bit of volatility, but the one thing that actually does give me a little bit of relief in any of this concern is if we look at the dispersion of these indexes. Dispersion can be to the upside or to the downside. A stat that I thought was really powerful is although this year has seen the largest dispersion from the top and the bottom performer in the index since 2020, which again, COVID had a lot of volatility that year, most of the dispersion is coming from upside performance. The downside dispersion relative to the index is that historical averages. When we talk about this bifurcated market, it's because the winners keep winning. As you mentioned this AI trade, we continue to see resiliency in the earnings, and that's another really important point. Investors shouldn't be concerned from evaluation perspective. A lot of these names that make up the MAG 7 have very strong earnings, and we just seen a little bit of a pivot, say from like meta in the last couple of weeks from these AI agents. So they're continuing this race to the top.

But from a historical seasonality perspective as well, there's a lot of reasons to be bullish in today's market.

SPEAKER_3 (2:49)

And Paisley, you use an analogy that I really liked in the notes that you sent over. You call this market a gradebook market. You say we really need to be focused more on the individual grades as opposed to the class average overall. So if this is more about selection mattering more than direction, what kind of characteristics are stocks that are getting A's right now possessing?

Paisley Nardini (3:13)

Yeah, I love this analogy because as an industry, we're so familiar with referencing a single point in time return. It only tells a fraction of the actual experience that most of investors have, which is really that class average. As we start to look underneath the surface, some of the areas of the market that I anticipate will continue to be buoyed by support from demand and we had thinking about supply implications as well, is like where are these bottlenecks as it relates to the AI trade? I think we all at this point understand that AI is really the driving force, even as we think beyond the technology sector. Today, as you guys mentioned just before I joined the show, Constellation Energy is seeing a massive boost to its stock price today, which is bringing up the utility sector. All of this is driven by the arrangement with Google.

As AI starts to trickle through various sectors, whether it be energy and we're thinking about to build out for nuclear power or electrification, whether that be healthcare, that's the sector that we're quite bullish on here at Tema, as we think that AI will be very beneficial to these companies going forward. And so looking through the noise, thinking through a more active approach to really understand where the bottlenecks from a supply perspective, knowing that AI demand will continue to persist.