Episode summary
Treasuries Fall as Jobs Data Curb Bets on Fed Cuts
Bloomberg Surveillance
· · Guests: Cameron Dawson, Ellen Zentner, Bret Kenwell, Brad Conger, Oscar Munoz, Gennadiy Goldberg, Angelo Kourkafas, Krishna Guha
Summary
High valuations in U.S. equities are being defended by investors as a quality story, but the guest argues that rationale is getting harder to sustain. With the market around 22 times forward earnings and 38 times forward on a cap ratio, he says investors have been “grasping for straws” to justify ever-higher multiples, and the recent questioning of software and other growth names has exposed how fragile that argument may be.
The discussion centers on a sharp rotation out of mega-cap growth and into cyclicals, value, and small- and mid-cap stocks. The guest calls it more than a shift, describing it as “practically a tsunami,” and says the move reflects a pain trade out of past winners into past losers. He also notes that consumer staples strength raises a broader question: whether the market is signaling concern about the consumer and a possible slowdown in household demand.
A second theme is whether company margin discipline is masking a weaker labor backdrop. The guest says firms have boosted profits by pulling back on hiring, but warns that if everyone does the same, consumption could weaken further. On software, he sees indiscriminate selling and says a bounce from oversold levels does not necessarily mean leadership is returning. Retail investors, he adds, may be increasingly “all in,” leaving the market vulnerable if the crowd finally leans too far one way.
Key takeaways
- The guest says U.S. equities are trading at very high valuations, with about 22 times forward earnings and 38 times forward on a cap ratio.
- He argues the rotation out of large-cap growth into cyclicals, value, and small/midcaps is more than a normal shift; it has been a “tsunami.”
- Strong performance in consumer staples could be a warning sign that the market is worrying more about the consumer, the guest says.
- The guest thinks software has seen indiscriminate selling and that an oversold bounce would not prove the group has regained leadership.
- He warns that if companies keep cutting hiring to protect margins, the weaker labor economy could eventually hurt consumption.
- The guest says retail investors may be close to fully committed, which could make the market vulnerable if positioning gets too crowded.
Notable quotes
“We come up with reasons to justify high valuations at the point where the fundamentals don't necessarily suggest it”
“These are historically very high multiples. And the justification that people have been using for those multiples has been, well, look how high quality the market is now”
“It's been practically a tsunami. And that's been because if you go back to October, you were at max long large cap mega-cap growth and you were Max short these cyclical areas”
“So you have to raise a little bit of an eyebrow of is this equity market telling us we should be more concerned about the consumer”
“I think for software you have seen indiscriminate selling. You've seen headlines of just get me out, you've seen effectively people dumping things, shooting first, asking questions later”
How the episode opens
We come up with reasons to justify high valuations at the point where the fundamentals don't necessarily suggest it. Meaning you start grasping for straws as to why valuations to trade at ever higher multiples. So when we think about today's environment, we're at 22 times forward earnings, 38 times forward on a cap ratio.
These are historically very high multiples. And the justification that people have been using for those multiples has been, well, look how high quality the market is now. Look at these software stocks with their strong recurring revenue and tech stocks with high free cash flow and high return on invested capital.
And what's fascinating is those are the exact things that we've been questioning the most as a market over the course of the last few weeks. So it's good to remember that that those famous last words tend to bite. So starting in late October, maybe early November, we've had a lot of folks will say is a rotational shift maybe out of some of those growth names, maybe it's some more value or small midcap.
Is it a rotation, which is one thing or is it a risk off call, which is another thing? And that's I know you have you've been thinking about that. Yeah, I would call it even more than a shift.
It's been practically a tsunami. And that's been because if you go back to October, you were at max long large cap mega-cap growth and you were Max short these cyclical areas. So a lot of this move has been effectively a pain trade out of past winners into the past losers.
I think the question is, do we take any economic message from this rotation? Part of the things that have been doing really well have been the very cyclical risk in parts of the market industrials, materials, energy.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- treasuries
- jobs report
- fed rate cuts
- software sector rotation
- market positioning
Companies and tickers mentioned
- MS
- TD
- EVR
- NewEdge Wealth
- Morgan Stanley Wealth Management
- eToro
- Hirtle Callaghan
- TD Securities
- Edward Jones
- Evercore
Watch the episode
Watch “Treasuries Fall as Jobs Data Curb Bets on Fed Cuts” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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