Episode summary
How Earnings, Volatility, and AI Capex Are Affecting US Markets
The Markets
· · 12 min · Hosts: Chris Hussey · Guests: Brian Garrett
Summary
Brian Garrett says earnings season is arriving with a very high bar for US equities. He points to analysts expecting 22% year-on-year earnings growth and to options pricing that implies an average S&P stock move of about 5.5%, above the long-run norm. Even so, he thinks positioning looks relatively clean because a lot of the rally has already been sold into earnings, especially among hedge funds.
He also argues that the AI infrastructure boom is starting to ripple into credit markets. Hyperscalers, which were long seen as cash-rich buyback machines, are now raising capital to fund what Goldman research estimates could require $5.5 trillion to $6 trillion between 2025 and 2030. That supply is widening spreads in parts of the technology bond market, and he says the gap between credit protection and equity protection shows how differently investors are pricing the same theme.
On volatility, Garrett says the market is split between muted index vol and intense single-stock vol. He notes that the S&P can look calm while names and regions like Korea remain extremely volatile, partly because of concentration and leveraged ETF flows. His practical message is that investors should use the current options market to buy protection efficiently, rather than chase upside after a strong run.
Key takeaways
- Brian Garrett says the bar for US earnings is very high, with analysts looking for 22% year-on-year EPS growth and the options market pricing a 5.5% average S&P stock move.
- He says hedge fund positioning is relatively clean heading into earnings because about 75% of global equities bought off the April lows have been sold.
- Garrett says hyperscalers may need to raise $5.5 trillion to $6 trillion from 2025 to 2030 to fund AI capex, and that supply is widening technology credit spreads.
- He says single-stock volatility remains high even as index volatility stays subdued, creating a wide gap between equity protection and credit protection.
- Garrett’s preferred trades are to fund downside protection on long equity positions with calls and to buy levered downside exposure on the S&P into August.
Notable quotes
“the very high bar that is being set for US equities into their earnings prints”
“the average S&P stock is implying like a 5.5% implied move, which is also between 60 and 70 bps higher than, you know, call it, the long-run average”
“we actually have pretty clean positioning”
“The AI build-out from the hyperscaler community is going to require a massive amount of capital”
How the episode opens
This is The Markets. I'm Chris Hussey, and today is Wednesday, July 15th, and I'm here on the Goldman Sachs trading floor with Brian Garrett, who heads up equities within the Cross-Asset Sales Team in Global Banking and Markets. Brian, thanks so much for joining us.
Chris, thanks for having me again. All right. We haven't had you on in a little bit.
It's been kind of an amazing run here for markets, yet at the same time, we have the Strait of Hormuz, inflation, high rates, midterm elections loom. All of that does not sound like it makes for a market that should be at an all-time high. What do you make of it all?
What are you looking at as we walk into earnings season? Yeah, sure. I mean, as you mentioned, earnings season is something that we're very focused on.
You know, you got pretty much half of the large banks reported earnings so far this week and, you know, S&P financial sector is making an all-time high this morning. So next week 20% of S&P market cap reports earnings. You know, I think the one thing that we're focused on is just the very high bar that is being set for US equities into their earnings prints.
The first one is fundamental. I think our analysts from bottoms-up perspective are expecting year-on-year earnings growth of 22%. And then when you look at the options market, you know, the average S&P stock is implying like a 5.5% implied move, which is also between 60 and 70 bps higher than, you know, call it, the long-run average.
So not only do equities have a high bar in terms of just you know, the EPS performance they can deliver, but they also have a really high bar in terms of price performance that they can deliver to kind of outperform what the option market is expecting.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- earnings outlook
- volatility divergence
- ai capex
- debt issuance
- fixed-income market impact
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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