Stocks Are Rotating Hard; This Is Where Smart Money Is Going | Sam Burns
Summary
AI: The guest views AI as a sustained leadership theme but warns of an “arms race” in data centers and models, requiring selectivity among winners.
Information Technology: He advises staying invested in tech, focusing on companies with real earnings, rising estimates, high margins, and strong ROE.
Semiconductors / NVDA: NVDA beat expectations and is the main beneficiary selling AI chips, though capex-heavy builds face rapid depreciation risks.
Financials: He pitches Financials as a contrarian opportunity with resilient earnings estimates and stable credit, not expecting a significant widening of spreads.
Gold: Bullish bias as a hedge and beneficiary of De-dollarization, with ongoing global demand to diversify away from USD exposure.
US equities: He expects stocks to hold up, with rotation from speculative names toward quality earners; energy remains underweight amid weak oil fundamentals.
Macro & Fed: Limited additional Fed cuts due to sticky inflation from tariffs and a mixed labor market; risk appetite remains the key equity driver.
Transcript
There's a risk in trying to get out too early as much as the risk of staying in. It resembles, you know, an arms race. The problem is in an arms race, you know, everyone cannot win an arms race. And in fact, in some cases, no one wins an arms race. There's basically been the demand to move assets or kind of exposure out of the US and the US dollar in particular uh will probably go on for a while longer. At least as long as Trump is there and causing chaos. People outside the US are trying to look for alternatives to the US dollar. There aren't a lot of good alternatives. So that's why gold has been has benefited. >> Sam Burns returns to the show. He is a chief market strategist at Mil Street Research. Sam was on the show a couple months ago back in August. Back then he was already warning that uh market momentum and economic growth momentum may stall. Well, it's been a few months since then and um it looks like it's stalling now. So we'll find out what's happening right now and where are investors rotating their capital too. Welcome back to the show Sam. Good to see you again. >> Uh thanks David. Good to see you again. You had argued a couple months ago that momentum was fading. Um the US economy entered 2025 with strong momentum but you believe that um it's it was weakening just late summer. Uh the primary reason was fiscal policy has turned from a tailwind to a headwind. Um under the current administration policy shift its growth negative and uh the equity model whipsaw. your model made uh its fastest move from bearish to bullish in 33 years and historically a rare V-shaped transition in risk appetite uh drove the change uh not better fundamentals and now we're kind of seeing that risk appetite reverse a little bit Bitcoin is below $87,000 so we're at a year-to- date loss on Bitcoin the NASDAQ today is down almost 1% uh this is after Nvidia beat earnings and made a strong announcement just last night and that wasn't enough to sustain the entire market So this selloff that has been going on for quite some time now, what is this a reflection of and generally speaking, what is your position on the economy today relative to a few months ago when I hand you back on? >> Uh yeah, I think you're right that the you know the key the mark equity markets has been risk appetite uh really certainly since April. uh it's basically been a massive risk on move from April to sort of mid-occtober which is when a lot of the kind of the really speculative you know uh risky assets peaked and have now pulled some of them have pulled back quite a bit including Bitcoin uh but a lot of the you know really speculative uh equities have also pulled back quite a bit whereas the overall market you know is down maybe 3 or 4% I think from the peak uh for the S&P 500 and some of the major indices so uh I think what's been going on is been a big rotation away from the really speculative, you know, companies that have little or no earnings and uh and crypto assets and things like that back in favor of companies that do have earnings and uh a little bit broader participation uh within the equity market. Um I think that also represents the fact that the economy is kind of undergoing this kind of K-shaped uh you know pattern where the higher end the the higher income uh um households and larger companies are are doing okay or doing well whereas the kind of middle and lower income households and smaller companies are struggling uh primarily due to you know due to policy. So I think that's what we're seeing in the markets as well as in the economy right now. Like I mentioned in the introduction, people are rotating capital out of stocks. Uh where are they going? Do we know? >> Um I think a lot of the money is staying in equities is rotating within equities. Uh some of it has gone into fixed income probably and some of it is leaving the US market and probably going into uh exus markets. So a lot of overseas uh equity markets have been actually outperforming the US recently and the dollar has been sort of you know weak earlier in the year and and stable a bit lately. Uh so I think there people are repositioning between US assets and non- US assets as well as uh within equities themselves. >> Uh what are the main forces or macro variables you're watching that could drive markets into 2026? In other words, the most important things for the markets um into the end of the year into the new year. I think the big thing for the major indices is going to be the earnings particularly for the tech sector. Uh the AI stocks a lot of those big names that are really driving both the market in terms of price but also uh the earnings uh earnings uh reports for Q3 were were mostly all very good uh better than expected earnings estimates are still rising uh for the US. So as long as that's the case I think there's you know some sort of earnings tailwind but a lot of that depends on um you know the kind of the big companies doing well or continuing to do well. I think the economy is going to be a lot more mixed. We're starting to see the unemployment rate creep up. Um even though immigration and labor supply has kind of declined. Um so I think we're going to uh have more of a of a mixed picture for the overall economy. I think the Fed is kind of a bit stuck in terms of its ability to respond uh policy-wise uh as aggressively as they might otherwise. I think that inflation is telling them one thing and labor market is telling them something else. So, we're going to get, you know, maybe one or two more cuts over the next 6 months, but not a lot. Um, so I think that will kind of um limit what would normally be otherwise be happening uh in terms of stimulus. So, let's talk about some uh current uh data here, starting with the labor market. So, we have here uh the number receiving unemployment benefits highest since August according to the labor department. And as you know, the government's been in shutdown. So, uh, we haven't really been up to date with government data, but from what we know, uh, the labor market has continued to weaken. More than 1.9 million Americans file claims for unemployment benefits mid-occtober, the highest mark since early August. Uh, for the week ending October 18th, the 1.957 million people filed for unemployment insurance with 232,000 filing new claims. The data compiled with the department's Employment and Training Administration is seasonally adjusted. Uh the number of Americans filing for unemployment marked an increase of 10,000 people relative to the week prior ending in uh October 20 uh September 20th rather and the highest number since 1.961 million in uh August 9th. Uh so so can you just respond to that data and other I guess labor market data you're looking at and give us a picture of how well the jobs market is performing right now? Yeah, you're right. And certainly we're flying a little bit blind just because the government shutdown has prevented some of the normal uh economic data from being collected or released. Uh you know, just today we got data for September uh which of course is is well out of date for for the monthly employment data. Uh the weekly uh unemployment claim data that you were mentioning there have deteriorated somewhat I think in the last you know month or so. um they kind of shifted uh kind of back in around I think April May uh to somewhat higher readings and have been sort of stable at that that general range recently. So the labor market isn't terrible, but it's not uh great. I think it shows that hiring is probably low lower uh but there's not a lot of widespread layoffs yet. So I think we're kind of in this sort of stasis where there are not as many people hiring but also not as many people uh you know available for work. the labor supply has also gone down. So, uh you're kind of in this mixed uh scenario, but the uh the unemployment rate they just released this morning was, you know, was up another uh step from last month about 4.4%. So, I think there's basically been a gradual, you know, kind of slow deterioration in the labor market after very strong readings in uh 22, 23, 24. Um, I think we're starting to gradually deteriorate. Um, in part because demand is weakening and in part because of the immigration and labor supply constraints. >> At the same time though, we have some maybe potentially conflicting uh reports. So, the jobs report um that came out uh recently defied expectations. Employers hired far more workers than expected in September, defying a sharp slowdown over the summer that appeared to cool off the labor market. So, the US added 119,000 jobs in September according to data from the US Bureau of Labor Statistics. That figure marks an acceleration from the previous month. I know September was a while ago, but I guess that's the latest data we have right now. Um, correct me if I'm wrong. And like you mentioned, the unemployment rate did take up to 4.4%. So, on the one hand, there was more hiring at some point in September or August. Um, but on the other hand, the unemployment rate ticked up and the um initial or continuing claims have been going up. So yeah, this how do you how do what how do you how do you um you know parse through this supposed or uh you know this this position here this dichotomy. >> Yeah and you're right it is it is sort of confusing and and gives different messages. Um I think the non-farm payrolls you know is a no noisy data set and particularly lately. Um and and the one of the things people have noticed is that um prior months have been revised lower uh for that series uh a few times recently including this this latest reading uh the numbers for you know the August for the prior month were revised down. So I think what we're getting is uh again fewer people being hired but also not very many people being fired. Um and so that means it's a less dynamic labor market but not a terrible one so far. Um I think uh the fact that labor supply has declined which is harder to measure. Um that is is means that the rise in unemployment rate is less than what it would have been otherwise. uh the number of new jobs over the last say you know 3 to six months has been quite low um and would normally be much more of a recession warning but now because there just aren't as many people available to be hired uh it's less of a you know sort of dramatic concern um and I think that's one of the reasons why the Fed has been very sort of back and forth and hesitant uh because they're not quite sure how weak the labor market is either um because uh some of the numbers you know in absolute terms are weak but in relative terms they're not so much if you account for labor supply. I think that's been the problem is the immigration change uh and labor supply has been so stark and so kind of uh unusual relative to the last few years or or most periods in history that um it's hard to figure out how to read that in the data uh cuz we just normally don't see that level of of a shift in uh in immigration and kind of you know new new labor supply coming in. Uh normally it's been you know more stable than that. So, uh, a lot of economists are really struggling with how to adjust for that. What's the right number to expect for non-farm payrolls or, uh, claims or things like that, uh, given that we're in a very different sort of scenario for labor supply right now? >> Okay. Um, are you concerned about more layoffs though into the, um, new year and potentially into Q1 2026? >> Uh, I think there's definitely a risk of that. Um, I think so far, you know, aggregate spending um, you know, by consumers and by businesses has held up. So I think to the extent that there's still spending going on, there will be still sufficient you know labor demand uh that that people won't want to fire their workers too too quickly and I think the impact of kind of AI replacing workers is is sort of maybe exaggerated in some cases um in the sense that I don't think it will be visible in the aggregate US economic data that quickly. I think it might be a gradual thing that happens over time but not you know kind of all at once. Um, so it's it's more a matter if if if people have money to spend and they're still spending it, then uh there'll be, you know, uh there won't be an incentive for uh companies to be doing a lot of layoffs. They may just limit how much new hiring they do as they're kind of, you know, kind of figured out what's going on with policy and tariffs and immigration and all the rest of it. I think a lot of companies have been kind of putting projects on pause and uh outside of AI and tech and uh and trying to figure out what's what's going to happen next year. Well, projects can't be put on pause indefinitely. So, at a certain point, companies have to say, "All right, we have to bite the bullet and just wait through this uncertainty." Is that moment, you know, close or is there going to be any such moment, do you think? >> Um, I mean, I think the data so far has shown that, uh, you basically have a lot of, you know, investment, corporate investment has been very strong in tech and slowing down basically everywhere else. uh most non- tech parts of the economy are not seeing a lot of new investment, people not building, you know, new factories and buildings and things like that outside of data centers and and technology. Um and I think that's in in large, you know, part because of the uncertainty about, you know, policy and uh and labor and interest rates and all that kind of thing. I think if we got some more rate cuts by the Fed, I think if spending holds up, um, and, uh, some of maybe some of the the policies, you know, like tariffs start to go, you know, go in reverse, get get cut back, that might allow some of these companies to go forward with some of the maybe the plans they put on hold, uh, if they think that there's going to be some clarity and and they won't suddenly get hit next week with a whole bunch of new tariffs or some other weird, you know, change in in rules and regulations um, that would derail their their plans. uh particularly anything that has to do with international you know global kind of expansion or you know building factories from companies overseas a lot of that stuff I think has been put on hold um and is waiting for more policy clarity um so for instance if the Supreme Court were to rule that the uh some of the Trump tariffs were illegal um and they start getting rolled back that might give some of these you know companies a little more uh willingness to to step forward and and and do some business as long as they don't think something else will come along you know to replace them. uh what in your opinion is maybe the biggest risk facing the economy right now? Um I think the biggest risk is is still you know um fiscal policy. Uh I think you know that the immigration and tariffs and uh all the kind of related uh you know policies like that as well as the healthcare policy uh which has done a lot of damage to the the US healthcare sector. Um those are probably the biggest risks. Um I think if not for that I think the economy would be doing better and you wouldn't see the kind of labor market you know kind of distress we're starting to see. Uh I think the tech sector and AI and all that is is helping you know uh in some ways. Um but it's not enough to keep the labor market strong. Um I think it's enough to keep some parts of technology uh the the the stock market and the u kind of uh technology related investment up. Um I also think that the the overall economy is more sensitive to the stock market and asset prices than it used to be. a lot more people are exposed to markets and um in terms of their just wealth and their their income and their spending than was the case you know in prior years. So if the stock market does go down a lot I think that'll have more impact on the economy than it would have say 5 or 10 years ago. >> Uh are you concerned about uh credit spreads widening and potentially deterioration of the financial sector? I actually think the financial sector itself is generally fine and I actually say one of the sectors that I have been telling clients if they're looking for uh kind of a contrarian or out of favor sector in equities to look for um the earnings estimates for financials are actually holding up quite well. Uh I don't think credit is a big problem for most of the economy. There there are always going to be a few spots where things are are riskier or starting to look wobbly. uh people are worried about some of the AI related you know data center uh debt and things that have been pushed around but I think uh overall credit is pretty pretty decent uh there's been some deterioration in some of the consumer credit side of things but overall I think still uh you know companies and people can pay their bills and most companies and households are in aggregate not overleveraged so I'm not as worried about that um it's more you know either certain specific sectors um or people just worried um you know about some of the exposure to things that uh I think has probably been overdone at this point. Um so I think if you know if the big if the tech sector and AI really crack uh that's going to you know have a ripple effect but uh I think overall right now the data look reasonably good uh for the financial sector and credit in general. I don't think credit spreads in general are going to go up uh that much uh for a while now. >> All right. Well, let's talk about um the Fed. Now the Fed has to deal with uh inflation and unemployment. So, let's talk about the inflation side first and then we can move on to talk about Fed policy factoring inflation and the jobs market that we just talked about. So, inflation right now uh has been trickingly up all year. If you look at trueflation though, which is um private sector data, it it's at 2.4% um which utilizes it's basically let me just take this indicator here. Um another economist just bring it up earlier to me. Trueflation CPI index utilize modern consumer and spending data sets along with cutting edge technology technology to to deliver the world's only verifiable daily inflation indexes. So um so that's lower than the government data. Uh but the government data has been ticking up and we know that the Fed looks at government data. So uh give us just a rundown of what has happened with inflation so far in 2025. what has influenced this rise in CPI and ultimately where you see it from here. Yeah, I know. And it has been confusing. Um, you know, obviously in part because we we don't have some of the data for the most current months uh that we'd like to have. Um, but also because uh there's been a sort of an underlying shift in that for a long time the main driver of inflation was was the services side of the economy including housing. uh but but a lot of services in general uh were where the inflation was whereas goods prices uh were relatively were coming down rapidly after 2022 and were actually somewhat falling uh until earlier this year. Um the shift has been that goods prices have been starting to to go up. Uh so you know washing machines, a lot of you know appliances and uh things particularly things that are imported uh because of the tariffs and things like that whereas the prices for services uh including housing have been slowing down. Um so uh and then the services is is a bigger weight is a bigger component of the overall CPI and the inflation data that you're seeing. So depending on which particular metrics you're looking at and what weights you put on them which is a difference maybe between uh trueflation and uh the CPI or the uh you know personal consumption expenditure price index that the Fed focuses on. um you know things like uh you know health insurance costs or auto insurance and um you know a lot of those factors that uh are harder to measure somewhat and and may not show up in some of the data like true inflation um those are what have been holding up inflation and it's really the fact that that goods prices are going up which is unusual um that I think has got the Fed worried because they are very directly tied to the tariffs and uh the disruption in in trade uh that we've seen most of this year uh and I think that's what their concern is is that there's more to come there. That companies have been absorbing some of the uh tariff and cost pressures, but they may have starting to run out of their ability to do that and that they're going to have to start raising prices more uh as we go over the next few months. And if that happens, that's going to keep that sort of CPI number, you know, higher than it would otherwise be. And it's already higher than what the Fed's target is. Um so it's it's around 3% or just under. Um and the Fed would like it to be kind of around 2 and 12%. Um, so if you're looking at inflation that's above target and maybe going the wrong direction, that's I think going to limit them from wanting to do um a lot more rate cuts. They've already cut rates twice this year. Um, but it looks like they've been saying they're probably not going to cut uh again in December at their next meeting. Um, they might cut again early next year if the labor market slows down further. Um, but what you've also seen is other central banks outside the US have continued to cut all year. uh because they're seeing inflation uh pressure start to ease a bit and um I think um that would have been happening in the US except for the tariffs and and the other disruptions and so I think that's the reason the Fed is the Fed has already basically said we would have cut rates more already except for uh tariff and and policy uncertainty and so now they're saying well labor markets starting to slow down so that's a reason to cut even though inflation is still kind of high and you've got a split uh in the Fed and actually last month's uh meeting had a very rare scenario where um one member of the Fed uh dissented because they wanted to keep rates up and another member descended by wanting to cut rates more. So they've actually descended in both directions, you know, at the same time uh which historically is quite unusual. Um so I think there's been a lot more disscent within the the Federal Reserve board, the FOMC, uh about which way to go. Um particularly now that the composition of the board has changed a bit. I have to talk about this trending topic that's been on everyone's radar pretty much in the last couple of months since we spoke. The issue has exacerbated the issue of whether or not the tech sector is in a bubble. And now, as a lot of people are aware from the propagation of this fact on social media, a lot of AI companies are sending money to each other in what's called circular financing, basically propping up each other's earnings and stock prices, while the rest of the sector that the S&P 500 has potentially lagged behind. And that's more indicative as you look down the value chain into the medium um size medium cap stocks and small cap stocks like the Russell 2000 that has continued to lag behind the S&P 500 which again is propped up by a few companies which which are propped up by sending the money to each other. So that looks like a bubble to a lot of people. Does it look like a bubble to you? Uh I think certainly the uh you know the spending the capex and all that kind of things definitely looks like um you know kind of has some bubble characteristics for sure. I think there's a lot of extrapolation going on about growth in that tech you know AI space um and to me it resembles you know an arms race um where each of these you know major companies is trying to be the first one uh to get the biggest best AI model and to to kind of capture the market in some sense. Um and I think you know the problem is that in an arms race you know everyone cannot win an arms race and in fact in some cases no one wins an arms race. Um and so I think um while there may be you know some company that that kind of you know wins um you know the fact that you know right now it's basically Nvidia is the main winner in the sense that they're the ones selling all the chips to everybody to to do all of this and uh but you know Microsoft and Meta and Google and the rest of them are you know building a lot of data centers and they all say their customers are demanding more uh both AI but also cloud computing and kind of you know moving uh technology into you know data centers and things like that and if there's more demand than they can handle. Um if that's true then it makes sense to you know to build more. Um the question is whether that's going to be say 2 3 years from now um going to have turned out to produce enough you know return on investment if there's going to be enough revenue behind it to justify whatever it is for half a bill half a trillion or a trillion dollars of you know capital expenditure to build all these uh you know new data centers and spend all the money on chips which you know as you know um the you know chip chip technology moves quickly and so they depreciate you know quickly in 3 years you know what's a what's a high-end chip now will not be a high-end ship in 3 years it will have been superseded and I think that's the risk that you have is that what you're building um will depreciate you know fast and that uh the companies may look back and say okay well we you know we over spent on some of this most of them are justifying that by saying if they don't spend now they'll they'll fall behind um but that's the arms race mentality uh and I think that's the risk that that people kind of uh uh some companies will win but everyone cannot win and the market is acting as though everyone can win Well, Nvidia just released earnings and I'll just give you some stats. Reported 57 billion revenue versus 54.9 expected. Uh so blowout results temporarily erased fears that the AI uh bubble was going to pop. So what do you do as an investor uh when confronted with information like this that these kit tech companies are generating a lot of topline revenue and they are managing uh growth and um earnings well so they're not you know losing money for the most part and um and some would say that the uh growth multiples are justified but on the other hand they look expensive relative to peers they look expensive relative to the rest of the market and there's fears of circular financing propping this bubble. So, um, what do you what do you do? On the one hand, you got good results. On the other hand, high valuations, but also the Fed is still in an easing cycle. Do you buy stocks in the tech sector right now? Uh, you know, just looking at these facts or do you stay on the sidelines? Yeah, I mean you know in my work with my institutional investment clients um you know I've been telling them to you know stay in equities generally speaking and to stay in the tech sector. Now what I have told them is that um you have to be a little bit more discerning and differentiated within the tech kind of space. um that for a while for instance the technology sector and the communication services sector which is where companies like uh Google and Meta live um those two had been kind of moving together um in terms of you know outperformance and strong earnings uh estimates and things like that and more recently we started to see that the communication services sector has kind of pulled back a bit started to lag um the earnings estimates are not quite as strong as they were before you know Meta's earnings kind of brought analyst uh made analysts a little bit less enthusiastic there as well as some other companies like Netflix uh or T-Mobile and things like that. So, I think you're starting to see a little bit of more differentiation within some of the tech space. Uh Oracle as well um you know got a big boost a few months ago and is now starting to kind of lose some of that momentum. Um whereas uh you know Google has done very well. Apple's done well lately. Um you know Microsoft, Broadcom um some of the other you know kind of big names are doing well and their earnings estimates are still rising. analysts are still having to raise their their forecasts uh because they've been too conservative. So to me that says that that um you know there is still good reason fundamentally to stay in um and that um yes some of these stocks are expensive but they do have high margins, high ROE um and still have revenue growth. So, um, they're the, you know, they at least to some degree earned their their multiples. Um, and so, uh, I think there's, um, a risk in trying to get out too early as much as trying to, uh, you know, to to to as much as the risk of staying in, um, if these are really where the leadership still is. And I think as long as there's sufficient risk appetite still there to buy companies that do have real earnings that are rising um I think that's going to you know um argue for staying in some of these areas at least for a little while longer. Um you know not forever maybe but uh I think it maybe um you have to wait for signs that things are really starting to to shift on the fundamental basis before um there's an argument to really get out of them entirely. Well, let's talk about your your outlook for uh interest rates in markets overall. So, um Trump jokingly uh threatened to fire Bessant if he doesn't lower interest rates. It's a joke because Besson can't lower interest rates. Uh the uh the only thing Scott's blowing it up blowing it on is the Fed. He said at a Saudi US investment event in Washington, "Rates are too high, Scott. If you don't get it fixed fast, I'm going to fire ass." Okay. I I don't know. I haven't seen the footage, so I don't know. I don't know what Scopa said in response to that. Probably just chuggle. I I don't know. But um someone's getting fired if rates aren't lower. I don't know. Can you respond? >> Yeah. >> To this and just generally give your outlook here. >> Yeah. And this is the problem of course that we are all facing is that this is just wildly out of you know norms in terms of how presidents behave with regard to the Federal Reserve uh or even their own Treasury Secretary. Um yes as you said the Treasury Secretary cannot lower interest rates um by himself. Um the Treasury Secretary does not hire and fire the Federal Reserve chair. Um, and of course Trump appointed Jerome Pal as the Fed chair in his first term, which he keeps seeming to forget. Um, and so, uh, now Trump did put, uh, a new Fed board member on recently, uh, Steven Moran. Um, once U the former Governor Cougler resigned suddenly. Um, and Moran has been pushing aggressively for lower rates during the Fed meeting, the last two Fed meetings that he sat in on. So I think that Trump is having that influence uh and does now have sort of his his lackey on the board. Um but he's one of 12 members of the the Federal Open Market Committee. So um so far he has not been able to uh kind of force the Fed to to lower rates. And Jerome Powell has made clear that he's not in a hurry to lower rates aggressively the way Trump is pushing him to. Um and that he doesn't agree with the the arguments for for lowering rates aggressively. Um and so I think uh you know so far I think also uh people around Trump have probably explained to him that if he does suddenly fire try to fire Jerome Powell that the markets would take that quite poorly. Uh the stock market would probably go down and um there would be a loss of confidence um and whoever you know he would choose to replace um Powell potentially. So, um, so I think that's why he's trying to to kind of shove the responsibility off on to, uh, to Scott Besson. Um, even though that's not really his role. Uh, I think a lot of this is just babbling and wish casting and, you know, kind of trying to, uh, you know, jawbone things the way he wants them to go, uh, for his own benefit. Um, I don't think there's a lot of good arguments for lowering rates aggressively. Um, you could lower them another 25 or 50 basis points and that'd probably be fine. But if inflation is still too high um and the unemployment rate is it is ticking up but 4.4% is not historically a high number um and so I think it's hard to argue particularly if spending is holding up that we really need aggressive rate cuts at this point and uh I think that's why the Fed is doing what it's doing which is probably you know not far from from what it should be doing in my view. Um, so I think this is just more political posturing um and evidence that we should not listen to Trump. >> Fair enough. But, uh, the Fed has to look at data that's, you know, in the rear view mirror, data that has already happened. But if you had to work at the Fed and make a forecast based on current data or speculation or trends, um, how would you, let's say, put it this way, if you had to take a guess as a Fed official as to where consumer spending is headed into the first quarter of 2026, which could impact uh inflation and which is a product, let's say, of the labor market conditions. uh what would your forecast on consumer sentiment and consumer strength be? Keeping in mind that the University of Michigan just released um its sentiment indicator for the prior month and it was possibly the second lowest I think in its history after the early 80s. So consumer sentiment is really really bad right now. >> No, that's right. I think yeah consumer sentiment um has been quite weak. Um I think uh a lot of people see the economy as as sort of you know weakening uh and the labor market as well. Um and I think that's also reflective of the fact that that sort of K-shaped economy we're in where the you know the the the wellto-do are doing fine and everybody else is maybe not so much u means that the majority of people are maybe you know anywhere from okay to to to not so good uh right now. But because a lot of the spending comes from, you know, the kind of higher income people and the larger companies, um you don't see it in the data so far. Um and so I think that's why the Fed is is is struggling. Um that the sort of the average person or the average company is kind of, you know, maybe okay at best. Um whereas the aggregate numbers are still generally, you know, looking okay. Um, I think that's um a tricky dynamic to to manage because interest rates are a very blunt instrument and it's hard to decide, you know, how they affect the economy and they affect it with a lag. Um, so my guess is that uh we'll probably see that continue going into the first quarter of next year. I think the high end holds up. If we started to get some relief on policy, I think that would improve things. Um, if we don't, I think things will continue to struggle. I think the Fed will have to cut rates maybe once or twice more. Um, but as long as tariffs are pushing inflation up, I think they're going to have a hard time arguing that they should lower rates with inflation, you know, around 3%, you know, above target. Um, and a lot of people seeing prices at the grocery store going up. Uh, that that's not really a reason to cut rates. So, I think fiscal policy is much more important than monetary policy in terms of its effect on the economy. Um, and the fact that we are still running, you know, a decentsized federal deficit. Um so there is still kind of money being printed essentially coming into the economy. Um it may not be allocated as well but it's it is still there. Um and so I think that's going to keep you know a certain level of spending going even if um you know policy is kind of throwing sand into the gears of the labor market and the international international trade. >> Okay. So it's almost the end of the year. Let's finish off on your outlook for markets. Uh I have here a chart showing uh some of the major asset classes that we regularly talk about on the show. Um starting from the top. So the gold line here is actually the the gold price. Um 52.7% up year to date. Um in blue we have the S&P uh sorry the NASDAQ index up 16%. S&P is up 11%. Bitcoin had a good streak. That streak is gone. It's now down 11% on the year. and uh energy prices are um struggling. So energy companies um not doing great. The WTI is down 19% year to date. Um putting our macro together, if you had to speculate as to which of these trends will likely continue or reverse, what would you say? >> Um I would say um I think stocks will probably hold up for a while longer. Um, I think that oil crude oil prices are probably going to be still struggle to go up. I think they're going to continue to maybe be sideways to down. I think the supply demand in crude oil is still still kind of weak. I think there's a lot of there's plenty of oil around and then it's just a matter of if there's periodic supply disruptions or not. Um, refining margins have gone up, so some oil refiners are doing better. Uh, but I think that basically oil is is not a good place to be. Uh I'm underway the energy sector uh in terms of the stock market. Um I think I don't have a strong view about Bitcoin. I don't have a good framework for analyzing it. Um it is clearly a risk appetite measure uh for the most part. Um and so I think it's probably had its best move for a while. I think it'll probably take time to to consolidate at best um and before it it you know crypto does well again. I think they've kind of had their run for now. Um so I think stocks are the best bet of those asset classes. I think gold may hold up. I think the demand to move um assets or kind of exposure out of the US and the US dollar in particular uh will probably go on for a while longer at least as long as Trump is there and causing chaos. I think a lot of central banks and a lot of you know people outside the US are trying to look for alternatives to the US dollar. There aren't a lot of good alternatives. So that's why gold has been has benefited. Um the euro has benefited. Um and uh so I think there's going to be some uh further moves there to to come. I think there's going to be people looking for ways to kind of avoid having too much exposure to the dollar uh and the US uh relative to let's say the last you know 10 years where people wanted to own the dollar and US assets. Um so I think that's going to be one of the headwinds. Uh but I don't think Bitcoin and and other cryptocurrencies can serve that role. So I think it is going to be gold and uh and other major uh non- US currencies that'll benefit from that. uh maybe we don't have to discuss bitcoin in detail but generally speaking whenever you see an asset that has historically followed another asset class so for example bitcoin has closely followed stocks and uh to some degree it's still it's still you know it still has you can see that the correlation remains consistent it's just that bitcoin has a much higher beta and so this downside move in the uh NASDAQ index from uh the middle of October to now has really uh has really been amplified in Bitcoin's move downward Anyway, whenever you see any sort of divergence um between two asset classes that have historically moved close to each other, what are the questions that you ask yourself to analyze um that movement? >> Yeah. And in the case of you know sort of NASDAQ and and Bitcoin, I mean you of course the big difference is that you know NASDAQ represents companies that have earnings and you know fundamentals and there's cash flows behind them and all that whereas Bitcoin does not. So there is no PE. There's no kind of uh fundamental structure for analyzing you know cryptocurrencies, Bitcoin. Um and so what the common factor they have of course is uh risk appetite and basically the PE on say the NASDAQ. Um and the movement of of something like Bitcoin are going to be the things that are that are moving in parallel. If investors in general have more risk appetite, they're going to pile into riskier stocks and riskier assets like like crypto. And I think what we're seeing now, as you said, since October, mid-occtober, there's been a big pullback in kind of risk appetite, uh, but earnings have still been pretty good. And so, you've seen NASDAQ has come down, but not nearly as much as, uh, as crypto has. And the same thing is true even within sort of the tech space or the equity market, the most speculative um, tech stocks and stocks that have little or no earnings that went up massively from sort of April to October, you know, double or triple in some cases. Um, those are the ones that have fallen the most. they've really cracked hard, you know, down 30% in some cases or more. Whereas the the big major NASDAQ companies uh that we all know uh are down but not nearly as much and have earnings to kind of support them. Um and so I think to me um it's a it's a real kind of almost clear measure of of risk appetite and you know how um speculative investors want are or want to be. Um, and so what normally happens is you get a big burst of speculative outperformance like from April to October. The same thing happened in late 2020, early 2021 till about February, March of that year. You had a massive rally and all the small caps, all the growth stocks, everything that was risky went up and then they cracked, but the the rest of the market still held on and and kept going up for another, you know, 6 to 12 months. Um, and only then when the economy really slowed down did the rest of the market come down. So, I think that's what we're doing right now is we're seeing the really risky stuff like Bitcoin and and then the stocks with no earnings crack, but the rest of the market I think will hold up because they do have earnings and then you'll see the next phase, you know, of kind of the rotation go on from here. So yeah, in the past you're right, slowdown of the economy has um predated a slowdown in the stock market. But could the reverse happen this time or will the reverse happen this time where we have basically a correction in equities markets or capital markets overall uh which will lead to uh the wealthy who hold these stocks losing a portion of their wealth and then they spend less and that leads to a slowdown that leads to the slowdown in the economy. >> Yeah. And I think that's the the risk here is that we've gotten ourselves now in a situation where uh asset prices and you know the wealth effect on the higherend consumer and companies is a much more dramatic impact or potentially a dramatic impact than it would have been even just a couple years ago because you don't have the kind of broad um you know the the the broad improvement in the economy and the labor market and kind of the lower and middle classes spending you know doing better uh which we had in kind of you know 22 3 and 4. um and you don't have the kind of broader based uh investment going on in the economy as well um that you had from some of the you know Biden policies and things like that um that now um the policies movements and the way markets have behaved have kind of shifted toward focusing more on the a smaller number of companies and a smaller number of households and that puts the uh the risk uh that if if something cracks within those households or the those companies uh that the the overall economy is going to feel it a lot more than it would have uh even a few years ago. >> Thanks a lot, Sam. Appreciate your update as always. Where can we learn more about you and uh Mil Street Research? >> Uh so yeah, so Milstrearch.com is the website. Uh there's a lot of uh information there, some sample reports you can check out. Um and then I do post on blue sky a lot more now. Uh you can find milstrearch there uh where there'll just be uh you know comments and updates uh about what I'm seeing in the market. Uh there's also a blog on the website that you can subscribe to uh if you want to get updates for that and of course institutional investors can reach out if they want to uh get access to the institutional research product. >> We'll put the links down below. Follow Sam there. Appreciate it, Sam. Speak next time. >> Thanks very much. Good to see you, David. >> Yeah, good to see you as well. Thank you for watching. Don't forget to like and subscribe.
Stocks Are Rotating Hard; This Is Where Smart Money Is Going | Sam Burns
Summary
Transcript
There's a risk in trying to get out too early as much as the risk of staying in. It resembles, you know, an arms race. The problem is in an arms race, you know, everyone cannot win an arms race. And in fact, in some cases, no one wins an arms race. There's basically been the demand to move assets or kind of exposure out of the US and the US dollar in particular uh will probably go on for a while longer. At least as long as Trump is there and causing chaos. People outside the US are trying to look for alternatives to the US dollar. There aren't a lot of good alternatives. So that's why gold has been has benefited. >> Sam Burns returns to the show. He is a chief market strategist at Mil Street Research. Sam was on the show a couple months ago back in August. Back then he was already warning that uh market momentum and economic growth momentum may stall. Well, it's been a few months since then and um it looks like it's stalling now. So we'll find out what's happening right now and where are investors rotating their capital too. Welcome back to the show Sam. Good to see you again. >> Uh thanks David. Good to see you again. You had argued a couple months ago that momentum was fading. Um the US economy entered 2025 with strong momentum but you believe that um it's it was weakening just late summer. Uh the primary reason was fiscal policy has turned from a tailwind to a headwind. Um under the current administration policy shift its growth negative and uh the equity model whipsaw. your model made uh its fastest move from bearish to bullish in 33 years and historically a rare V-shaped transition in risk appetite uh drove the change uh not better fundamentals and now we're kind of seeing that risk appetite reverse a little bit Bitcoin is below $87,000 so we're at a year-to- date loss on Bitcoin the NASDAQ today is down almost 1% uh this is after Nvidia beat earnings and made a strong announcement just last night and that wasn't enough to sustain the entire market So this selloff that has been going on for quite some time now, what is this a reflection of and generally speaking, what is your position on the economy today relative to a few months ago when I hand you back on? >> Uh yeah, I think you're right that the you know the key the mark equity markets has been risk appetite uh really certainly since April. uh it's basically been a massive risk on move from April to sort of mid-occtober which is when a lot of the kind of the really speculative you know uh risky assets peaked and have now pulled some of them have pulled back quite a bit including Bitcoin uh but a lot of the you know really speculative uh equities have also pulled back quite a bit whereas the overall market you know is down maybe 3 or 4% I think from the peak uh for the S&P 500 and some of the major indices so uh I think what's been going on is been a big rotation away from the really speculative, you know, companies that have little or no earnings and uh and crypto assets and things like that back in favor of companies that do have earnings and uh a little bit broader participation uh within the equity market. Um I think that also represents the fact that the economy is kind of undergoing this kind of K-shaped uh you know pattern where the higher end the the higher income uh um households and larger companies are are doing okay or doing well whereas the kind of middle and lower income households and smaller companies are struggling uh primarily due to you know due to policy. So I think that's what we're seeing in the markets as well as in the economy right now. Like I mentioned in the introduction, people are rotating capital out of stocks. Uh where are they going? Do we know? >> Um I think a lot of the money is staying in equities is rotating within equities. Uh some of it has gone into fixed income probably and some of it is leaving the US market and probably going into uh exus markets. So a lot of overseas uh equity markets have been actually outperforming the US recently and the dollar has been sort of you know weak earlier in the year and and stable a bit lately. Uh so I think there people are repositioning between US assets and non- US assets as well as uh within equities themselves. >> Uh what are the main forces or macro variables you're watching that could drive markets into 2026? In other words, the most important things for the markets um into the end of the year into the new year. I think the big thing for the major indices is going to be the earnings particularly for the tech sector. Uh the AI stocks a lot of those big names that are really driving both the market in terms of price but also uh the earnings uh earnings uh reports for Q3 were were mostly all very good uh better than expected earnings estimates are still rising uh for the US. So as long as that's the case I think there's you know some sort of earnings tailwind but a lot of that depends on um you know the kind of the big companies doing well or continuing to do well. I think the economy is going to be a lot more mixed. We're starting to see the unemployment rate creep up. Um even though immigration and labor supply has kind of declined. Um so I think we're going to uh have more of a of a mixed picture for the overall economy. I think the Fed is kind of a bit stuck in terms of its ability to respond uh policy-wise uh as aggressively as they might otherwise. I think that inflation is telling them one thing and labor market is telling them something else. So, we're going to get, you know, maybe one or two more cuts over the next 6 months, but not a lot. Um, so I think that will kind of um limit what would normally be otherwise be happening uh in terms of stimulus. So, let's talk about some uh current uh data here, starting with the labor market. So, we have here uh the number receiving unemployment benefits highest since August according to the labor department. And as you know, the government's been in shutdown. So, uh, we haven't really been up to date with government data, but from what we know, uh, the labor market has continued to weaken. More than 1.9 million Americans file claims for unemployment benefits mid-occtober, the highest mark since early August. Uh, for the week ending October 18th, the 1.957 million people filed for unemployment insurance with 232,000 filing new claims. The data compiled with the department's Employment and Training Administration is seasonally adjusted. Uh the number of Americans filing for unemployment marked an increase of 10,000 people relative to the week prior ending in uh October 20 uh September 20th rather and the highest number since 1.961 million in uh August 9th. Uh so so can you just respond to that data and other I guess labor market data you're looking at and give us a picture of how well the jobs market is performing right now? Yeah, you're right. And certainly we're flying a little bit blind just because the government shutdown has prevented some of the normal uh economic data from being collected or released. Uh you know, just today we got data for September uh which of course is is well out of date for for the monthly employment data. Uh the weekly uh unemployment claim data that you were mentioning there have deteriorated somewhat I think in the last you know month or so. um they kind of shifted uh kind of back in around I think April May uh to somewhat higher readings and have been sort of stable at that that general range recently. So the labor market isn't terrible, but it's not uh great. I think it shows that hiring is probably low lower uh but there's not a lot of widespread layoffs yet. So I think we're kind of in this sort of stasis where there are not as many people hiring but also not as many people uh you know available for work. the labor supply has also gone down. So, uh you're kind of in this mixed uh scenario, but the uh the unemployment rate they just released this morning was, you know, was up another uh step from last month about 4.4%. So, I think there's basically been a gradual, you know, kind of slow deterioration in the labor market after very strong readings in uh 22, 23, 24. Um, I think we're starting to gradually deteriorate. Um, in part because demand is weakening and in part because of the immigration and labor supply constraints. >> At the same time though, we have some maybe potentially conflicting uh reports. So, the jobs report um that came out uh recently defied expectations. Employers hired far more workers than expected in September, defying a sharp slowdown over the summer that appeared to cool off the labor market. So, the US added 119,000 jobs in September according to data from the US Bureau of Labor Statistics. That figure marks an acceleration from the previous month. I know September was a while ago, but I guess that's the latest data we have right now. Um, correct me if I'm wrong. And like you mentioned, the unemployment rate did take up to 4.4%. So, on the one hand, there was more hiring at some point in September or August. Um, but on the other hand, the unemployment rate ticked up and the um initial or continuing claims have been going up. So yeah, this how do you how do what how do you how do you um you know parse through this supposed or uh you know this this position here this dichotomy. >> Yeah and you're right it is it is sort of confusing and and gives different messages. Um I think the non-farm payrolls you know is a no noisy data set and particularly lately. Um and and the one of the things people have noticed is that um prior months have been revised lower uh for that series uh a few times recently including this this latest reading uh the numbers for you know the August for the prior month were revised down. So I think what we're getting is uh again fewer people being hired but also not very many people being fired. Um and so that means it's a less dynamic labor market but not a terrible one so far. Um I think uh the fact that labor supply has declined which is harder to measure. Um that is is means that the rise in unemployment rate is less than what it would have been otherwise. uh the number of new jobs over the last say you know 3 to six months has been quite low um and would normally be much more of a recession warning but now because there just aren't as many people available to be hired uh it's less of a you know sort of dramatic concern um and I think that's one of the reasons why the Fed has been very sort of back and forth and hesitant uh because they're not quite sure how weak the labor market is either um because uh some of the numbers you know in absolute terms are weak but in relative terms they're not so much if you account for labor supply. I think that's been the problem is the immigration change uh and labor supply has been so stark and so kind of uh unusual relative to the last few years or or most periods in history that um it's hard to figure out how to read that in the data uh cuz we just normally don't see that level of of a shift in uh in immigration and kind of you know new new labor supply coming in. Uh normally it's been you know more stable than that. So, uh, a lot of economists are really struggling with how to adjust for that. What's the right number to expect for non-farm payrolls or, uh, claims or things like that, uh, given that we're in a very different sort of scenario for labor supply right now? >> Okay. Um, are you concerned about more layoffs though into the, um, new year and potentially into Q1 2026? >> Uh, I think there's definitely a risk of that. Um, I think so far, you know, aggregate spending um, you know, by consumers and by businesses has held up. So I think to the extent that there's still spending going on, there will be still sufficient you know labor demand uh that that people won't want to fire their workers too too quickly and I think the impact of kind of AI replacing workers is is sort of maybe exaggerated in some cases um in the sense that I don't think it will be visible in the aggregate US economic data that quickly. I think it might be a gradual thing that happens over time but not you know kind of all at once. Um, so it's it's more a matter if if if people have money to spend and they're still spending it, then uh there'll be, you know, uh there won't be an incentive for uh companies to be doing a lot of layoffs. They may just limit how much new hiring they do as they're kind of, you know, kind of figured out what's going on with policy and tariffs and immigration and all the rest of it. I think a lot of companies have been kind of putting projects on pause and uh outside of AI and tech and uh and trying to figure out what's what's going to happen next year. Well, projects can't be put on pause indefinitely. So, at a certain point, companies have to say, "All right, we have to bite the bullet and just wait through this uncertainty." Is that moment, you know, close or is there going to be any such moment, do you think? >> Um, I mean, I think the data so far has shown that, uh, you basically have a lot of, you know, investment, corporate investment has been very strong in tech and slowing down basically everywhere else. uh most non- tech parts of the economy are not seeing a lot of new investment, people not building, you know, new factories and buildings and things like that outside of data centers and and technology. Um and I think that's in in large, you know, part because of the uncertainty about, you know, policy and uh and labor and interest rates and all that kind of thing. I think if we got some more rate cuts by the Fed, I think if spending holds up, um, and, uh, some of maybe some of the the policies, you know, like tariffs start to go, you know, go in reverse, get get cut back, that might allow some of these companies to go forward with some of the maybe the plans they put on hold, uh, if they think that there's going to be some clarity and and they won't suddenly get hit next week with a whole bunch of new tariffs or some other weird, you know, change in in rules and regulations um, that would derail their their plans. uh particularly anything that has to do with international you know global kind of expansion or you know building factories from companies overseas a lot of that stuff I think has been put on hold um and is waiting for more policy clarity um so for instance if the Supreme Court were to rule that the uh some of the Trump tariffs were illegal um and they start getting rolled back that might give some of these you know companies a little more uh willingness to to step forward and and and do some business as long as they don't think something else will come along you know to replace them. uh what in your opinion is maybe the biggest risk facing the economy right now? Um I think the biggest risk is is still you know um fiscal policy. Uh I think you know that the immigration and tariffs and uh all the kind of related uh you know policies like that as well as the healthcare policy uh which has done a lot of damage to the the US healthcare sector. Um those are probably the biggest risks. Um I think if not for that I think the economy would be doing better and you wouldn't see the kind of labor market you know kind of distress we're starting to see. Uh I think the tech sector and AI and all that is is helping you know uh in some ways. Um but it's not enough to keep the labor market strong. Um I think it's enough to keep some parts of technology uh the the the stock market and the u kind of uh technology related investment up. Um I also think that the the overall economy is more sensitive to the stock market and asset prices than it used to be. a lot more people are exposed to markets and um in terms of their just wealth and their their income and their spending than was the case you know in prior years. So if the stock market does go down a lot I think that'll have more impact on the economy than it would have say 5 or 10 years ago. >> Uh are you concerned about uh credit spreads widening and potentially deterioration of the financial sector? I actually think the financial sector itself is generally fine and I actually say one of the sectors that I have been telling clients if they're looking for uh kind of a contrarian or out of favor sector in equities to look for um the earnings estimates for financials are actually holding up quite well. Uh I don't think credit is a big problem for most of the economy. There there are always going to be a few spots where things are are riskier or starting to look wobbly. uh people are worried about some of the AI related you know data center uh debt and things that have been pushed around but I think uh overall credit is pretty pretty decent uh there's been some deterioration in some of the consumer credit side of things but overall I think still uh you know companies and people can pay their bills and most companies and households are in aggregate not overleveraged so I'm not as worried about that um it's more you know either certain specific sectors um or people just worried um you know about some of the exposure to things that uh I think has probably been overdone at this point. Um so I think if you know if the big if the tech sector and AI really crack uh that's going to you know have a ripple effect but uh I think overall right now the data look reasonably good uh for the financial sector and credit in general. I don't think credit spreads in general are going to go up uh that much uh for a while now. >> All right. Well, let's talk about um the Fed. Now the Fed has to deal with uh inflation and unemployment. So, let's talk about the inflation side first and then we can move on to talk about Fed policy factoring inflation and the jobs market that we just talked about. So, inflation right now uh has been trickingly up all year. If you look at trueflation though, which is um private sector data, it it's at 2.4% um which utilizes it's basically let me just take this indicator here. Um another economist just bring it up earlier to me. Trueflation CPI index utilize modern consumer and spending data sets along with cutting edge technology technology to to deliver the world's only verifiable daily inflation indexes. So um so that's lower than the government data. Uh but the government data has been ticking up and we know that the Fed looks at government data. So uh give us just a rundown of what has happened with inflation so far in 2025. what has influenced this rise in CPI and ultimately where you see it from here. Yeah, I know. And it has been confusing. Um, you know, obviously in part because we we don't have some of the data for the most current months uh that we'd like to have. Um, but also because uh there's been a sort of an underlying shift in that for a long time the main driver of inflation was was the services side of the economy including housing. uh but but a lot of services in general uh were where the inflation was whereas goods prices uh were relatively were coming down rapidly after 2022 and were actually somewhat falling uh until earlier this year. Um the shift has been that goods prices have been starting to to go up. Uh so you know washing machines, a lot of you know appliances and uh things particularly things that are imported uh because of the tariffs and things like that whereas the prices for services uh including housing have been slowing down. Um so uh and then the services is is a bigger weight is a bigger component of the overall CPI and the inflation data that you're seeing. So depending on which particular metrics you're looking at and what weights you put on them which is a difference maybe between uh trueflation and uh the CPI or the uh you know personal consumption expenditure price index that the Fed focuses on. um you know things like uh you know health insurance costs or auto insurance and um you know a lot of those factors that uh are harder to measure somewhat and and may not show up in some of the data like true inflation um those are what have been holding up inflation and it's really the fact that that goods prices are going up which is unusual um that I think has got the Fed worried because they are very directly tied to the tariffs and uh the disruption in in trade uh that we've seen most of this year uh and I think that's what their concern is is that there's more to come there. That companies have been absorbing some of the uh tariff and cost pressures, but they may have starting to run out of their ability to do that and that they're going to have to start raising prices more uh as we go over the next few months. And if that happens, that's going to keep that sort of CPI number, you know, higher than it would otherwise be. And it's already higher than what the Fed's target is. Um so it's it's around 3% or just under. Um and the Fed would like it to be kind of around 2 and 12%. Um, so if you're looking at inflation that's above target and maybe going the wrong direction, that's I think going to limit them from wanting to do um a lot more rate cuts. They've already cut rates twice this year. Um, but it looks like they've been saying they're probably not going to cut uh again in December at their next meeting. Um, they might cut again early next year if the labor market slows down further. Um, but what you've also seen is other central banks outside the US have continued to cut all year. uh because they're seeing inflation uh pressure start to ease a bit and um I think um that would have been happening in the US except for the tariffs and and the other disruptions and so I think that's the reason the Fed is the Fed has already basically said we would have cut rates more already except for uh tariff and and policy uncertainty and so now they're saying well labor markets starting to slow down so that's a reason to cut even though inflation is still kind of high and you've got a split uh in the Fed and actually last month's uh meeting had a very rare scenario where um one member of the Fed uh dissented because they wanted to keep rates up and another member descended by wanting to cut rates more. So they've actually descended in both directions, you know, at the same time uh which historically is quite unusual. Um so I think there's been a lot more disscent within the the Federal Reserve board, the FOMC, uh about which way to go. Um particularly now that the composition of the board has changed a bit. I have to talk about this trending topic that's been on everyone's radar pretty much in the last couple of months since we spoke. The issue has exacerbated the issue of whether or not the tech sector is in a bubble. And now, as a lot of people are aware from the propagation of this fact on social media, a lot of AI companies are sending money to each other in what's called circular financing, basically propping up each other's earnings and stock prices, while the rest of the sector that the S&P 500 has potentially lagged behind. And that's more indicative as you look down the value chain into the medium um size medium cap stocks and small cap stocks like the Russell 2000 that has continued to lag behind the S&P 500 which again is propped up by a few companies which which are propped up by sending the money to each other. So that looks like a bubble to a lot of people. Does it look like a bubble to you? Uh I think certainly the uh you know the spending the capex and all that kind of things definitely looks like um you know kind of has some bubble characteristics for sure. I think there's a lot of extrapolation going on about growth in that tech you know AI space um and to me it resembles you know an arms race um where each of these you know major companies is trying to be the first one uh to get the biggest best AI model and to to kind of capture the market in some sense. Um and I think you know the problem is that in an arms race you know everyone cannot win an arms race and in fact in some cases no one wins an arms race. Um and so I think um while there may be you know some company that that kind of you know wins um you know the fact that you know right now it's basically Nvidia is the main winner in the sense that they're the ones selling all the chips to everybody to to do all of this and uh but you know Microsoft and Meta and Google and the rest of them are you know building a lot of data centers and they all say their customers are demanding more uh both AI but also cloud computing and kind of you know moving uh technology into you know data centers and things like that and if there's more demand than they can handle. Um if that's true then it makes sense to you know to build more. Um the question is whether that's going to be say 2 3 years from now um going to have turned out to produce enough you know return on investment if there's going to be enough revenue behind it to justify whatever it is for half a bill half a trillion or a trillion dollars of you know capital expenditure to build all these uh you know new data centers and spend all the money on chips which you know as you know um the you know chip chip technology moves quickly and so they depreciate you know quickly in 3 years you know what's a what's a high-end chip now will not be a high-end ship in 3 years it will have been superseded and I think that's the risk that you have is that what you're building um will depreciate you know fast and that uh the companies may look back and say okay well we you know we over spent on some of this most of them are justifying that by saying if they don't spend now they'll they'll fall behind um but that's the arms race mentality uh and I think that's the risk that that people kind of uh uh some companies will win but everyone cannot win and the market is acting as though everyone can win Well, Nvidia just released earnings and I'll just give you some stats. Reported 57 billion revenue versus 54.9 expected. Uh so blowout results temporarily erased fears that the AI uh bubble was going to pop. So what do you do as an investor uh when confronted with information like this that these kit tech companies are generating a lot of topline revenue and they are managing uh growth and um earnings well so they're not you know losing money for the most part and um and some would say that the uh growth multiples are justified but on the other hand they look expensive relative to peers they look expensive relative to the rest of the market and there's fears of circular financing propping this bubble. So, um, what do you what do you do? On the one hand, you got good results. On the other hand, high valuations, but also the Fed is still in an easing cycle. Do you buy stocks in the tech sector right now? Uh, you know, just looking at these facts or do you stay on the sidelines? Yeah, I mean you know in my work with my institutional investment clients um you know I've been telling them to you know stay in equities generally speaking and to stay in the tech sector. Now what I have told them is that um you have to be a little bit more discerning and differentiated within the tech kind of space. um that for a while for instance the technology sector and the communication services sector which is where companies like uh Google and Meta live um those two had been kind of moving together um in terms of you know outperformance and strong earnings uh estimates and things like that and more recently we started to see that the communication services sector has kind of pulled back a bit started to lag um the earnings estimates are not quite as strong as they were before you know Meta's earnings kind of brought analyst uh made analysts a little bit less enthusiastic there as well as some other companies like Netflix uh or T-Mobile and things like that. So, I think you're starting to see a little bit of more differentiation within some of the tech space. Uh Oracle as well um you know got a big boost a few months ago and is now starting to kind of lose some of that momentum. Um whereas uh you know Google has done very well. Apple's done well lately. Um you know Microsoft, Broadcom um some of the other you know kind of big names are doing well and their earnings estimates are still rising. analysts are still having to raise their their forecasts uh because they've been too conservative. So to me that says that that um you know there is still good reason fundamentally to stay in um and that um yes some of these stocks are expensive but they do have high margins, high ROE um and still have revenue growth. So, um, they're the, you know, they at least to some degree earned their their multiples. Um, and so, uh, I think there's, um, a risk in trying to get out too early as much as trying to, uh, you know, to to to as much as the risk of staying in, um, if these are really where the leadership still is. And I think as long as there's sufficient risk appetite still there to buy companies that do have real earnings that are rising um I think that's going to you know um argue for staying in some of these areas at least for a little while longer. Um you know not forever maybe but uh I think it maybe um you have to wait for signs that things are really starting to to shift on the fundamental basis before um there's an argument to really get out of them entirely. Well, let's talk about your your outlook for uh interest rates in markets overall. So, um Trump jokingly uh threatened to fire Bessant if he doesn't lower interest rates. It's a joke because Besson can't lower interest rates. Uh the uh the only thing Scott's blowing it up blowing it on is the Fed. He said at a Saudi US investment event in Washington, "Rates are too high, Scott. If you don't get it fixed fast, I'm going to fire ass." Okay. I I don't know. I haven't seen the footage, so I don't know. I don't know what Scopa said in response to that. Probably just chuggle. I I don't know. But um someone's getting fired if rates aren't lower. I don't know. Can you respond? >> Yeah. >> To this and just generally give your outlook here. >> Yeah. And this is the problem of course that we are all facing is that this is just wildly out of you know norms in terms of how presidents behave with regard to the Federal Reserve uh or even their own Treasury Secretary. Um yes as you said the Treasury Secretary cannot lower interest rates um by himself. Um the Treasury Secretary does not hire and fire the Federal Reserve chair. Um, and of course Trump appointed Jerome Pal as the Fed chair in his first term, which he keeps seeming to forget. Um, and so, uh, now Trump did put, uh, a new Fed board member on recently, uh, Steven Moran. Um, once U the former Governor Cougler resigned suddenly. Um, and Moran has been pushing aggressively for lower rates during the Fed meeting, the last two Fed meetings that he sat in on. So I think that Trump is having that influence uh and does now have sort of his his lackey on the board. Um but he's one of 12 members of the the Federal Open Market Committee. So um so far he has not been able to uh kind of force the Fed to to lower rates. And Jerome Powell has made clear that he's not in a hurry to lower rates aggressively the way Trump is pushing him to. Um and that he doesn't agree with the the arguments for for lowering rates aggressively. Um and so I think uh you know so far I think also uh people around Trump have probably explained to him that if he does suddenly fire try to fire Jerome Powell that the markets would take that quite poorly. Uh the stock market would probably go down and um there would be a loss of confidence um and whoever you know he would choose to replace um Powell potentially. So, um, so I think that's why he's trying to to kind of shove the responsibility off on to, uh, to Scott Besson. Um, even though that's not really his role. Uh, I think a lot of this is just babbling and wish casting and, you know, kind of trying to, uh, you know, jawbone things the way he wants them to go, uh, for his own benefit. Um, I don't think there's a lot of good arguments for lowering rates aggressively. Um, you could lower them another 25 or 50 basis points and that'd probably be fine. But if inflation is still too high um and the unemployment rate is it is ticking up but 4.4% is not historically a high number um and so I think it's hard to argue particularly if spending is holding up that we really need aggressive rate cuts at this point and uh I think that's why the Fed is doing what it's doing which is probably you know not far from from what it should be doing in my view. Um, so I think this is just more political posturing um and evidence that we should not listen to Trump. >> Fair enough. But, uh, the Fed has to look at data that's, you know, in the rear view mirror, data that has already happened. But if you had to work at the Fed and make a forecast based on current data or speculation or trends, um, how would you, let's say, put it this way, if you had to take a guess as a Fed official as to where consumer spending is headed into the first quarter of 2026, which could impact uh inflation and which is a product, let's say, of the labor market conditions. uh what would your forecast on consumer sentiment and consumer strength be? Keeping in mind that the University of Michigan just released um its sentiment indicator for the prior month and it was possibly the second lowest I think in its history after the early 80s. So consumer sentiment is really really bad right now. >> No, that's right. I think yeah consumer sentiment um has been quite weak. Um I think uh a lot of people see the economy as as sort of you know weakening uh and the labor market as well. Um and I think that's also reflective of the fact that that sort of K-shaped economy we're in where the you know the the the wellto-do are doing fine and everybody else is maybe not so much u means that the majority of people are maybe you know anywhere from okay to to to not so good uh right now. But because a lot of the spending comes from, you know, the kind of higher income people and the larger companies, um you don't see it in the data so far. Um and so I think that's why the Fed is is is struggling. Um that the sort of the average person or the average company is kind of, you know, maybe okay at best. Um whereas the aggregate numbers are still generally, you know, looking okay. Um, I think that's um a tricky dynamic to to manage because interest rates are a very blunt instrument and it's hard to decide, you know, how they affect the economy and they affect it with a lag. Um, so my guess is that uh we'll probably see that continue going into the first quarter of next year. I think the high end holds up. If we started to get some relief on policy, I think that would improve things. Um, if we don't, I think things will continue to struggle. I think the Fed will have to cut rates maybe once or twice more. Um, but as long as tariffs are pushing inflation up, I think they're going to have a hard time arguing that they should lower rates with inflation, you know, around 3%, you know, above target. Um, and a lot of people seeing prices at the grocery store going up. Uh, that that's not really a reason to cut rates. So, I think fiscal policy is much more important than monetary policy in terms of its effect on the economy. Um, and the fact that we are still running, you know, a decentsized federal deficit. Um so there is still kind of money being printed essentially coming into the economy. Um it may not be allocated as well but it's it is still there. Um and so I think that's going to keep you know a certain level of spending going even if um you know policy is kind of throwing sand into the gears of the labor market and the international international trade. >> Okay. So it's almost the end of the year. Let's finish off on your outlook for markets. Uh I have here a chart showing uh some of the major asset classes that we regularly talk about on the show. Um starting from the top. So the gold line here is actually the the gold price. Um 52.7% up year to date. Um in blue we have the S&P uh sorry the NASDAQ index up 16%. S&P is up 11%. Bitcoin had a good streak. That streak is gone. It's now down 11% on the year. and uh energy prices are um struggling. So energy companies um not doing great. The WTI is down 19% year to date. Um putting our macro together, if you had to speculate as to which of these trends will likely continue or reverse, what would you say? >> Um I would say um I think stocks will probably hold up for a while longer. Um, I think that oil crude oil prices are probably going to be still struggle to go up. I think they're going to continue to maybe be sideways to down. I think the supply demand in crude oil is still still kind of weak. I think there's a lot of there's plenty of oil around and then it's just a matter of if there's periodic supply disruptions or not. Um, refining margins have gone up, so some oil refiners are doing better. Uh, but I think that basically oil is is not a good place to be. Uh I'm underway the energy sector uh in terms of the stock market. Um I think I don't have a strong view about Bitcoin. I don't have a good framework for analyzing it. Um it is clearly a risk appetite measure uh for the most part. Um and so I think it's probably had its best move for a while. I think it'll probably take time to to consolidate at best um and before it it you know crypto does well again. I think they've kind of had their run for now. Um so I think stocks are the best bet of those asset classes. I think gold may hold up. I think the demand to move um assets or kind of exposure out of the US and the US dollar in particular uh will probably go on for a while longer at least as long as Trump is there and causing chaos. I think a lot of central banks and a lot of you know people outside the US are trying to look for alternatives to the US dollar. There aren't a lot of good alternatives. So that's why gold has been has benefited. Um the euro has benefited. Um and uh so I think there's going to be some uh further moves there to to come. I think there's going to be people looking for ways to kind of avoid having too much exposure to the dollar uh and the US uh relative to let's say the last you know 10 years where people wanted to own the dollar and US assets. Um so I think that's going to be one of the headwinds. Uh but I don't think Bitcoin and and other cryptocurrencies can serve that role. So I think it is going to be gold and uh and other major uh non- US currencies that'll benefit from that. uh maybe we don't have to discuss bitcoin in detail but generally speaking whenever you see an asset that has historically followed another asset class so for example bitcoin has closely followed stocks and uh to some degree it's still it's still you know it still has you can see that the correlation remains consistent it's just that bitcoin has a much higher beta and so this downside move in the uh NASDAQ index from uh the middle of October to now has really uh has really been amplified in Bitcoin's move downward Anyway, whenever you see any sort of divergence um between two asset classes that have historically moved close to each other, what are the questions that you ask yourself to analyze um that movement? >> Yeah. And in the case of you know sort of NASDAQ and and Bitcoin, I mean you of course the big difference is that you know NASDAQ represents companies that have earnings and you know fundamentals and there's cash flows behind them and all that whereas Bitcoin does not. So there is no PE. There's no kind of uh fundamental structure for analyzing you know cryptocurrencies, Bitcoin. Um and so what the common factor they have of course is uh risk appetite and basically the PE on say the NASDAQ. Um and the movement of of something like Bitcoin are going to be the things that are that are moving in parallel. If investors in general have more risk appetite, they're going to pile into riskier stocks and riskier assets like like crypto. And I think what we're seeing now, as you said, since October, mid-occtober, there's been a big pullback in kind of risk appetite, uh, but earnings have still been pretty good. And so, you've seen NASDAQ has come down, but not nearly as much as, uh, as crypto has. And the same thing is true even within sort of the tech space or the equity market, the most speculative um, tech stocks and stocks that have little or no earnings that went up massively from sort of April to October, you know, double or triple in some cases. Um, those are the ones that have fallen the most. they've really cracked hard, you know, down 30% in some cases or more. Whereas the the big major NASDAQ companies uh that we all know uh are down but not nearly as much and have earnings to kind of support them. Um and so I think to me um it's a it's a real kind of almost clear measure of of risk appetite and you know how um speculative investors want are or want to be. Um, and so what normally happens is you get a big burst of speculative outperformance like from April to October. The same thing happened in late 2020, early 2021 till about February, March of that year. You had a massive rally and all the small caps, all the growth stocks, everything that was risky went up and then they cracked, but the the rest of the market still held on and and kept going up for another, you know, 6 to 12 months. Um, and only then when the economy really slowed down did the rest of the market come down. So, I think that's what we're doing right now is we're seeing the really risky stuff like Bitcoin and and then the stocks with no earnings crack, but the rest of the market I think will hold up because they do have earnings and then you'll see the next phase, you know, of kind of the rotation go on from here. So yeah, in the past you're right, slowdown of the economy has um predated a slowdown in the stock market. But could the reverse happen this time or will the reverse happen this time where we have basically a correction in equities markets or capital markets overall uh which will lead to uh the wealthy who hold these stocks losing a portion of their wealth and then they spend less and that leads to a slowdown that leads to the slowdown in the economy. >> Yeah. And I think that's the the risk here is that we've gotten ourselves now in a situation where uh asset prices and you know the wealth effect on the higherend consumer and companies is a much more dramatic impact or potentially a dramatic impact than it would have been even just a couple years ago because you don't have the kind of broad um you know the the the broad improvement in the economy and the labor market and kind of the lower and middle classes spending you know doing better uh which we had in kind of you know 22 3 and 4. um and you don't have the kind of broader based uh investment going on in the economy as well um that you had from some of the you know Biden policies and things like that um that now um the policies movements and the way markets have behaved have kind of shifted toward focusing more on the a smaller number of companies and a smaller number of households and that puts the uh the risk uh that if if something cracks within those households or the those companies uh that the the overall economy is going to feel it a lot more than it would have uh even a few years ago. >> Thanks a lot, Sam. Appreciate your update as always. Where can we learn more about you and uh Mil Street Research? >> Uh so yeah, so Milstrearch.com is the website. Uh there's a lot of uh information there, some sample reports you can check out. Um and then I do post on blue sky a lot more now. Uh you can find milstrearch there uh where there'll just be uh you know comments and updates uh about what I'm seeing in the market. Uh there's also a blog on the website that you can subscribe to uh if you want to get updates for that and of course institutional investors can reach out if they want to uh get access to the institutional research product. >> We'll put the links down below. Follow Sam there. Appreciate it, Sam. Speak next time. >> Thanks very much. Good to see you, David. >> Yeah, good to see you as well. Thank you for watching. Don't forget to like and subscribe.