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Here's the word on Wall Street. Lisa shamanamlkan Stanley writes in this with equities having round tripped back towards first quarter ending levels, markets are anxious to move on from tariffs and attempts to anticipate FED policy. Lisa johnsis nap for more. Lisa good Mornic, Good morning. How many times have we asked this question? Was, oh, just a bet dream? Can we just move on?
So look, I think investors right now are weary and want to move on, They want to look through it. But I do think that things have fundamentally changed from the NASDAC peak back on December sixteenth. I think the first thing that has changed is it's really clear that top line growth among the MAG seven is decelerating, and growth investors typically don't like to see deceleration. The second thing is we're seeing this arms war with regard to capex spending continuing. If we are to st update on.
Looking at free cash flow yields shows MAG seven free cash flow years shrinking by about eleven percent. Typically, these stocks don't tend to do particularly well when their free cash flow yield is coming down and look, we can pretend that the deep Seek news doesn't mean anything, but we fundamentally think it was the wake up call around global engineering, global innovation, and the fact that none of us know how the movie ends here on jen Ai, who the winners are going to be, how it's going
to evolve, whether or not large language models very quickly become commoditized, and the next you know, phase of the buildout is actually much lower data center intensity, much lower energy intensity because it's very application based. So nobody knows nothing. And I think right now, this is a market where we've had you know, a lot of positioning, technical positioning where people felt, hey, you know, I was caught off guard. This was a massive surprise. You know, the effective China
tariff rate is much lower than I penciled. I got to plow back in. You've got you know, some of the private wealth money and retail money coming in from the sidelines. But I think we're going to stall out here. I think it's just hard to justify the numbers. You know, you've round tripped back to January first on market levels, and yet your earnings per share are down six percent, So.
You'd fight this move. I'm fading what would you rotate out of and what would you rotate into.
Yeah, so you know, we're continuing to you know, recommend that folks take some profits in now the new leaders again in tech and really focus on the beneficiaries of deregulation. And so we see that as you know, financials, we see it as energy, we see it as you know some of the healthcare names. I know for viewers out there, that's going to sound like a big value style bias,
but quite frankly, it is. You know, while while we're not saying you've got to be overweight value, we do think you want value in this market because you want some risk premium. I mean, there are risks out there, and you want to get paid to be in this market.
What risks do you want a premium to be paid for? And this sounds sort of existential, but it goes to the heart of the question of is it inflation or is it recession or is it both?
I think it's a little bit of both.
I think we're somewhat less freaked out about inflation than perhaps we would have been if the tariff rates would have held. I think what we're worried about is that we're no longer in a fore castable policy backdrop.
Right.
As much as we all want to handwring about the FED, you know, for the last fifteen years, FED policy has been reasonably stable and reasonably well telegraphed, and there haven't been massive surprises. I think when we shift to a fiscal policy backdrop with this administration, as we've seen, it's very easy to experience both negative and positive surprises on policy. And that's what I want to get paid for, is that at any point, you know, things can take a u turn based on the headlines.
How much do the rest of the universe that you didn't mention big tech that you're selling on the margins, or some of the financials and other value stocks that you're looking at that don't exactly value as you pointed out, how much do you think that it really will require FED cuts to get the rest of the universe involved in some sort of positive momentum.
I think the rate cuts are absolutely you know, required for small cap mid cap I think that universe has suffered profoundly, you know, from the higher cost of capital by and large, the S and P five hundred, which is predominantly large in megacap companies have been pretty isolated. They very healthy balance sheets, and for the most part, they haven't been inhibited by rates where they are, which is why we have multiples where they are. Well.
It raises this question, especially as the fiscal debate heats up in Washington, DC, and you alluded to this, and there's a question about as we find out how much the deficits is going to increase, how much bond markets are going to freak out. To use your sophisticated harlans, but there is this question of at what level in a thirty y or in a ten year yield, it becomes prohibitive for stocks to really move higher from here and really inject some damage.
Yeah, I mean, look, I think for most of the last you know, six to twelve months that you know, four point fifty on the ten year, four point five percent on the ten year, you know, was kind of this stall out threshold. You know, the market seems to be battling with it a little bit this week, but look, I think if we back up, you know, if we get big, big, big deficit numbers coming out of this tax bill, and that ten year moves into that four to seventy five range, I don't see how the markets,
how equity value wations hold here. The math just stops making sense.
Lisa, it's good to see you as always. Thanks for dropping By Lisa Shalling to moncl Stanley