Market Strategist Highlights High Earnings Expectations Amid AI Sector Concentration

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Bloomberg Jul 8 11:13 · 14.2k Views

Jordan Jackson, Global Market Strategist at JPMorgan Asset Management, discussed the approaching earnings season and the challenges posed by elevated market expectations. While S&P 500 earnings growth is projected at over 20% for the quarter, excluding technology sectors reduces growth estimates to around 11%, which still represents solid double-digit expansion. He speaks with Romaine Bostick & Katie Greifeld on "The Close."

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00:00 I am curious about
00:01 the I this whole issue of high expectations.
00:03 We kind of saw that play out with the whole Samsung thing in in South Korea overnight.
00:07 But I was also looking, I kept being told by a lot of folks and we were going to start to see a broadening
00:12 of this sort of earnings picture.
00:15 But then I was looking at the Bloomberg estimates, we're talking like 20 plus percent growth for the quarter on the S&P 500 as a whole.
00:22 Strip out technology and that number drops to 11.
00:25 When when do we start to see a broadening out of the earnings picture?
00:27 Well, I think we first want to put a little bit into context, right?
00:30 11 is not really a bad number, right.
00:31 You know from from a, from a broader sense still still double digits.
00:34 And when we look at some of those sectors, those value orientated sectors, even last quarter
00:38 materials industrials did quite well with the exception of course of energy, which is going to be a big bounce back in terms of the reported earnings that we get in, in the second quarter.
00:47 But I think the most important barometer markets price off expectations
00:51 and the bar for these earnings expectations continue to be moved higher.
00:54 These chip makers delivered stellar earnings.
00:56 We're in a historic earnings cycle right now.
00:59 But again, that bar has has been set significantly higher.
01:02 So becomes more challenging
01:03 for the markets to kind of keep pace with this
01:05 earnings projection.
01:06 Do you anticipate, I mean, let's just take Samsung for example,
01:10 you know, profit growth
01:11 nineteenfold
01:13 by any measure that is phenomenal.
01:15 But we had the sell off over there in Korea and it raises questions about what happens when we start to get
01:20 Micron, NVIDIA and all these high flying tech names.
01:24 And does it matter what they say?
01:26 Like
01:26 it's almost like any number they put out there, unless it's just completely eye popping,
01:30 they're going to face the potential of a sell off.
01:33 I think that's the that's
01:34 part of the big risk to the market, right?
01:35 The markets are almost priced for perfection,
01:38 you know, from an earnings perspective, from a broad economic perspective
01:41 and still still very concentrated in a small subset
01:44 of of the market.
01:45 It
01:46 kind of feels like sort of the Harry Potter Sorting hat.
01:48 The marks are going to figure, you know, which which area of the AI value chain that it's going to, it's
01:52 going to focus on and next.
01:53 And right now we're in the memory phase,
01:56 but but we're still finding opportunities within that value stack.
01:59 We we like power.
02:00 We think, you know, software earnings have been resilient and it's probably sold off
02:03 a little bit too much.
02:04 We still like the picks and the shovels, you know, so to speak, in the market.
02:07 So now this is a market that is presenting us, you know, opportunities more broadly.
02:11 And we still think this is, you know, undergirded by by earnings.
02:14 Keep in mind, you know, the valuation, the market has come down this year, even though we're flirting with all time highs.
02:18 Yeah, it's a good point.
02:19 And it seems unintuitive when you think about
02:22 just how far we've come on a performance level.
02:24 But talk to us a little bit about what you're seeing when it comes to the hyper scalers, because you mentioned that,
02:29 you know, memories is certainly the the apple of investors eyes right now.
02:34 But then you have
02:35 a lot of folks, including Morgan Stanley, coming out and saying that hyper scalers
02:39 look cheap here.
02:40 You think about how they've been beaten up, and I wonder how you're viewing that cohort.
02:44 Yeah, it's interesting because it feels like the market is moved past
02:48 the hyper scalers, but
02:49 they're still expected to deliver, you know, still very strong, very resilient earnings growth.
02:54 The cohort is no longer acting as one kind of behemoth.
02:57 They're kind of moving to their own beats of their their own drum,
03:00 so to speak.
03:01 We like certain companies that have access to kind of all levers of the value chains that puts a few of those kind of at the upper kind of overweights within within our broader book, a book of business,
03:14 you know,
03:14 but I think the markets want to see the money, they want to see the profitability, they want to see
03:18 if you're going to be raising your CapEx, you need to be raising your revenue targets commensurately.
03:23 And if you're not doing that, the markets are kind of, you know, not, not too excited about the amount of spending that we're seeing.
03:28 I mean, we're expecting to see a trillion dollar
03:30 in hyperscaler spend,
03:32 you know, next year alone.
03:34 And a decent portion of that could very well be financing in the debt markets, which
03:38 still doesn't for me seem to be a prop, an issuer problem, But I think it's more so of a bond market problem in terms of absorption of that issuance.
03:45 Well,
03:45 talk to us a little bit about that.
03:47 You know, how you're thinking through some of those factors because I mean, as you mentioned, the
03:51 debt primary markets have been on absolute fire.
03:54 We saw
03:55 Amazon, for example, come out today with their own offering and I believe that was oversubscribed, but still maybe starting to get a little bit of a cooler reception.
04:03 You saw that with Spacex's debt offering as well.
04:07 When you put together those tea leaves, what are they starting to say?
04:10 I think it's starting to say that, you know, we are looking at and this is coming back to a broader portfolio
04:16 problem.
04:16 We talk a lot of concentration risk in the equity market,
04:20 but we're forecasting increased concentration risk also in the bond market as well as we're starting to see these hyperscaler issued debt at
04:26 the same pace as some of the financials which you know are the are big issuers
04:29 of of debt as well.
04:30 And if we're looking at in say an IG market right now, that's about 10% in, in, in, in, in, in, in tech,
04:37 you know, we could see that number get 15 to 20% over the next couple of years, just given the the issuance that we're seeing coming through
04:43 that introduces structurally higher
04:46 positive correlation between both your equities and your bonds within your portfolio.
04:50 And so we've got to be a little bit more thoughtful about how we craft the well diversified portfolio given that it feels like everything across public markets are going increasingly concentrated in all things AI and tech.
05:00 When we talk about the risk out there, obviously the concentration risk, the technical risk, the fundamental risk is there, is there still macro risk in any sort of meaningful way out there?
05:09 I think the macro risk has waned a little bit,
05:11 right.
05:12 The broader consensus is that we are past peak inflation.
05:14 Even when you look at the most aggressive kind of economist efforts.
05:17 We've kind of peaked out.
05:18 Maybe we, we kind of hover around 4 for a little bit, but but come down,
05:21 I think the job market is showing signs of, of stability.
05:24 I think we're we're stabilizing at kind of a 75 to 100 pace,
05:29 a pace of payroll growth
05:31 and we're seeing an economy that is normalizing towards 2%.
05:34 We don't necessarily bind to the notion that this is an economy that's reaccelerating here.
05:38 You also have a Fed that we think is that the bar to hike rates is still quite high, quite elevated.
05:43 And so you've got it on net
05:45 Fed on pause, inflation coming down, the consumer continue to hang in there, particularly driven by upper income households.
05:51 You know, all this suggests that the macro risk
05:53 perhaps, you know maybe skewed to some upside risk to growth in the back up of the year, not downside.