Episode summary
The US Midterms: Reshaping the Stock Market
The Markets
· · Guests: Lou Miller
Summary
Lou Miller says the market rotation that was already underway before the midterms likely continues into year-end, with investors still positioned defensively after a difficult second half for active managers. He argues that the data-center and broader AI infrastructure trade has already derated sharply, with multiples compressed enough that valuation is no longer a headwind and the setup for upside surprises is better than it was earlier in the year.
He sees healthcare as the next leg of the AI trade and a better defensive than traditional staples. In his view, healthcare combines defensive characteristics with improving fundamentals as tools and diagnostics businesses benefit from both cyclical and secular tailwinds. He is less enthusiastic about consumer staples, saying their earnings and dividend yields do not justify current prices versus bonds.
The trade he prefers is the S&P 500 excluding AI: lower valuation, quality balance sheets, and low-teens earnings growth. Looking ahead, he is watching employment, inflation, geopolitics, and earnings, along with equity and debt capital markets and the December 9 FOMC decision. He also expects a "relaxed Santa Rally," suggesting a constructive but not euphoric finish to the year.
Key takeaways
- Lou Miller says data-center stocks are down 36% from their highs, while memory is down 42%, optical networking 46%, and NeoCloud 57%.
- Lou Miller argues the data-center trade’s multiple is about half of what it was in June, so valuation is no longer a headwind.
- Lou Miller says healthcare is the next leg of the AI trade because it is defensive and increasingly shows both cyclical and secular growth drivers.
- Lou Miller thinks traditional staples are expensive, with earnings yield and dividend yield each roughly half of comparable bond yields.
- Lou Miller prefers the S&P 500 excluding AI, which he says offers high-quality balance sheets and low-teens earnings growth at a lower multiple.
Notable quotes
“We now see data center stocks down 36% from their highs earlier this year”
“I think the next leg of the AI trade is actually healthcare, and I think that's also a very defensive sector”
“the earnings yield of staples is half of the high yield bond yield”
“I think the S&P 500 excluding AI is the trade”
“I think a relaxed Santa Rally, yes”
How the episode opens
This is The Markets. I'm Chris Hussey, and today is Thursday, November 5th, and we're here on the Goldman Sachs trading floor with Lou Miller, who is our global head of our custom baskets business within FICC and Equities. And on the back of the midterm elections, we're going to explore the market reaction and where we go from here.
Lou, thanks so much for joining us. Thanks for having me. Let's start with the rotation trade that you can see from your baskets group.
In particular, that there was a rotation already happening before the midterms. How is that evolving post midterms? Where do you think it heads into the year end?
Yeah, so we've seen, especially in the second half of the year, it's been a really challenging environment for active investors, and we've seen people get very defensive. If you look at beta-adjusted net exposure in our prime book, it's definitely at very low levels versus history. Let me peel back the onion a little bit on the rotation.
Let's talk about data centers if we can. How is that data center trade holding up in the post-election world? Worse than I would've thought.
I think it's bigger picture concerns like ROI, open-source competition, limits on capital markets came into picture the last few months. The AI data center trade, the right tail of that trade has increasingly gotten removed, and multiples have dramatically dropped to much healthier levels. We now see data center stocks down 36% from their highs earlier this year.
And then some of the higher beta areas like memory down 42%, optical networking down 46%, even NeoCloud's down 57%. So the early reaction was way more extreme than I would've expected, but I think the silver lining is the bar is much, much lower for surprises and there are positive catalysts ahead.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- us midterm elections
- stock market rotation
- defensive sectors valuation
- healthcare earnings acceleration
- data center buildout valuations
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “The US Midterms: Reshaping the Stock Market” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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