Damian: But I think people are mis-pricing both the magnitude of how deep that recession will be and the timing of it. And until we see deterioration, we are, you know, just keep calm and compound on.
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Announcer: Welcome to Breadth of Experience, a TDAM Talks podcast. You're listening to part two of a three-part discussion on the equity markets, featuring Jose Alancherry, Ben Gossack, and Damian Fernandes. Listen in to this part for insight on corporate earnings, the health of the US economy, and the market moving potential of social media.
Jose: This is a fantastic brand, right? We've been in a bull market for some time. And this happened like a blip. It happened. And, now, markets are where they are. They're back again.
Ben: 1% from the highs.
Jose: From the highs. And what about the fundamentals themselves? What about corporate earnings? What's your take-away? And just the recovery itself, it means that, any time there's a dip, at some point, people seem to be buying the dip. That mantra seems to be alive and well. So what's the read here?
Damian: So I think the most, at least for me-- and I know Ben may have a different take on it, too. But I thought the most interesting thing in the Q2 earnings that were just reported was, the S&P 500, the US market, earnings bottomed last year. Q2 2023 was the bottom in earnings. And we've seen sequential improvement in growth. Now, the horsemen that had initially led this initial improvement in growth were tied to AI and data centers.
So the NVIDIAs, the Meta's, they were the ones who were pulling it in, forward. But yeah, the rest of the market, though, was actually kind of still squishy. What happened this quarter, Q2, was, for the first time since going back a few years, the rest of the market also participated in that earnings growth, right? So you had breath in earnings delivery. And I thought that, of course, the Mag Seven-- I hate-- it's a pejorative term.
But the data center names, yeah, quality and large cap continued to outperform, continued to grow. But this time around, in this earnings, the rest of the market also, it wasn't just one side of the market. It was kind of broad. And that's my point. We're seeing a broadening out. And, look, some stocks, like the industrials and tech, really have led this market out. But when you start seeing financials report really good numbers, you see a broadening out in the market structure. I think that's positive for markets, generally. Ben, what's your take?
Ben: Yeah, look, I think fundamentals have been solid and strong. But just going back to what you were saying before, people want to discount. And I'll make a story about myself. But I remember just being a junior analyst. You're being asked to look at a company. You look at everything. You do your industry analysis. You do company analysis. You do your financials.
You build your financial model. You do your evaluation. And then you're like, you know what? I think it's fairly valued. And you tell your portfolio manager, if there's a 10% pullback, we should buy this. And then, well, as you said, as you said, how you get that 10% pullback means something broke. And you're never-- you're going to say, you know what? Let's wait another quarter. Let's wait this one out.
I think it goes back to, you don't have to believe in our process. But you should have a discipline process. You shouldn't be trying to sit on 10% cash, then bring it down to 1% cash. Follow your process. It always goes back to compounding. And it's the timing that kills that compounding magic.
Jose: Yeah, that's actually well-said, in that, oftentimes, when that moment comes, you second-guess yourself. The staying true to that process is key. But Damian, you unpacked a little bit of what-- financials, utilities, and just in terms of broadening it out, because there is this perception in the market that it's just a few stocks, in some sense, even to this day, despite this broadening out. The performance has come. You're now saying the fundamentals are broadening out. Does this bode really well for the market going forward? Are people missing a broader story here, losing the forest from the trees by just looking at the large caps?
Damian: Yeah, we are-- I thought that one of the more interesting things from the more recent quarterly reporting was, financials were one of the best performing sectors, right? But financials-- and they're talking loan. And loan balances were increasing. Losses were less than expected. Capital markets activity, deal activity, is back. So, look, for us, our edge isn't thinking about the next quarter's earnings. Our edge is thinking about, what is the market mis-pricing?
What is the market mis-pricing, you know, three, five, the three years from now? And I think, if you asked me, I think the market is still waiting for this recession to appear, that they're mis-pricing the economic growth that comes in on average, just what's happening, just what's happening right now. And I think, look, a recession will inevitably appear. But I think people are mis-pricing both the magnitude of how deep that recession will be and the timing of it. And until we see deterioration, we are just, like, keep calm and compound on.
Jose: That is an interesting point, where, just from a macro sense-- we just had the Jackson Hole Symposium. We're on the precipice of an easing cycle, in some sense. The market is pricing in for rate cuts at this point. What's your take on the overall health of the economy itself? Are these fears justified, or this is just back to conventionality, where, they've done a great job. They've kind of put the inflation genie back into some sense, you could say. What's your take on the overall health of the US economy? Which is the bellwether?
Ben: Yeah, so I think we can talk about the economy. And then we can talk about the stock market. And I think those two are not the same thing. But they're often intertwined. I think the labor market has held up much better than anyone has expected. There is a shortage of workers for certain areas. And companies are having to sort of pay up to attract it. We also know that the consumer has been stretched. And prices have been rapidly increasing.
And whether you're filling up fuel for your car, or whether you're going to restaurants, or you're going to the store, there's a reason why companies like McDonald's and others have now had to compete on a value-based menu. People are angry. And so, they're making adjustments in their day to day lives. So I think people's fears about how the consumer and the economy will be affected by the rising interest rates obviously didn't play out.
But nevertheless, it is tight. And so, yes, lowering rates will help to ease that pain. What I would argue, though, and if anyone has renewed their mortgage recently, I think you would realize that the market adjusts. And it's always a step ahead of any of these central banks. And so, the rates that any of us, whether Damian's borrowing, or you, Jose, or myself, have already reflected cuts.
So, again, I just want to remind people, if you're waiting for a central bank to make a decision, you're waiting for that press release, do know that the market has already anticipated that, factored that in, and have lowered interest rates for a corporation, for a consumer. And so, I think that's why we have seen a lift off in certain financials. I'm not going to say all financials because some banks are facing credit provision issues. Some banks are not.
Jose: Which ones are?
Ben: Well, we just had Canadian banks report. And some of them have almost a full cycle of provisions, again, how their loan book was structured. And some things were better than appeared. So I think it's also important to understand what the banks, what they set up. They had to set up their economic forecasts. Each bank has a different economic forecast. And that can drive different trends in their provision.
Jose: In their provisioning, yes, which ultimately impacts their earnings profile. Well, is the battle against inflation over, or do you think we're in a different world? It's almost football season now. A term that's been thrown about for some time was the immaculate disinflation, in some sense. Have central bankers kind of achieved it? Do they need a pat on the back? Because they're everyone's favorite punching bag.
Damian: Central bank will never get a pat on the back, just to be--
Jose: Just to be clear, OK. But have they kind of achieved? Because everyone's fear, like you said, was, you're going to raise rates. Something's going to break. But nothing's broken. People seem to still be looking for something to break. And this explains a lot of this dissonance in market performance.
Damian: So just maybe on the inflation thing, right? Inflation has gone from 9.1% to under 3% right now. That is--
Jose: We're in the two handles.
Damian: Yeah, we're in a two handle inflation. So to say that inflation is still a problem, actually, it belies the facts, right? The facts are, we've had a seven basis point correction in inflation. A lot of that has been technical. And I'm not so sure-- it's like, yes, central bank tightening has slowed activity and reduced demand. But a lot of the inflation that we actually experienced was because of things like supply chain, right?
Container ships not being able to be offloaded, labor supply imbalances. So I think what was really, truly, about coming out in the COVID recovery was that you had a precedent that wasn't there before, right? Because you had corrections, inventory corrections, in things like semis and autos, while at the same time that people were indulging on vacations, right?
Jose: And those are imbalances of economy.
Damian: Yeah, those imbalances. And so, I think we're just going into a more normal environment. Do we see signs that inflation is going to materially accelerate from here? No. But do we see signs inflation is going to drop below 2%? And we're going to be in this structurally-deflationary environment? I think that's also-- I think growth coming out of the pandemic is higher. We're recording this today.
And real GDP was just released. Real GDP is sitting at a 3.1% handle because actual nominal growth is fine. And inflation is falling. So real GDP, by definition, is higher. We are actually-- and I think the market has slowly digested. 2010 to COVID, economic growth, what we call normal, economic, real growth, is actually where we are today, post-COVID. We're in a structurally higher economic growth environment. It might be more volatile. But I think growth is structurally higher than it was pre-pandemic. And why is no one excited about this potential?
Jose: Because they're too focused on their social media, which is just doom and gloom. I don't know. Ben, what's your call?
Ben: And prices are near all-time highs.
Jose: Yeah, earnings are also at near all-time highs. Prices are near all-time highs. We're on the precipice of potentially an easing cycle. If you ask me, just no other conditions, stock market up or down, most people should instinctively go up. But there seems to be this concern. And is it social media that's driving this? Where is this? What's your thesis here? Just a 30-second spitball, yeah.
Damian: The more time people spend on social media, the more corrosive it is, because, look, consumers are feeling unhappy. But you're feeling unhappy when you're following people who are--
Jose: Living in mansions?
Damian: Yeah, uh.. Ben?.
Ben: I would say, I find stuff moves faster. So the market prices thinks faster. Everything's coming-- you know, you might think you're ahead on a certain idea. And once the market picks that up, then things get really reflected faster in prices. There was an interview that I did with Doug Warwick that people can look up, where, to look up the dividend yield, you had to go to a library.
Or back in the day, the federal reserve would change the interest rate. And there wasn't a press release. People found out months later. So things are really, really fast. And then, the other issue would be, I do think people project their situation or how they feel about their current situation. And they project it on the prices of assets. And then they say, how could this be possible? Or why is this happening? And it makes them either angry or sad.
And I think people have to be reminded that these are inanimate objects. And too often times, we ascribe a certain personality to a stock. And its pricing will be its behavior. But they're not people. But oftentimes, you do hear, where it's like, why is this possible? Or how is this? And so, again, focus on a process. And catch yourself if you start to sort of project these sort of human traits on, honestly, just a price on a screen.
Jose: Price, yes. Sometimes, taking the emotions out. And that is a great way to think about that. And, now, shifting gears slightly, we covered a lot of the US. But you're both global managers. The whole sandbox is open for you. What's your reading on the major regions of the world, the EU, China, Japan? Which has all been in the news recently. Where do you see the opportunities? Has this, the last couple of months, opened your eyes to more opportunities outside? What's your take here?
Damian: Maybe. Look, I think the rest of the world is growing in line. Ben, you can talk about Japan because you'll be visiting there shortly. And you're pretty excited about it. But I think, if I was going to take 12 months ago or start of this year, if you asked me, and if you asked me to compare what my outlook is today versus the start of the year, the big difference, I think, is on the negative side. And it's the degree that just China and Chinese growth and the algorithm just hasn't gotten off the map.
China hasn't participated, hasn't grown. In fact, they're in deflation. PPI in China is negative. The property market is a disaster. And there's capital outflow. So if you ask me, what's a little different? The consumer-- consumption there is still improving. There's still pockets of strength. But the rest of the world, whether it's Europe, Japan, Canada, it's actually in line with the original expectations. I think, for me, though, the big thing, as I look as we're recording this, eight months into the year has been that you've seen no growth impulse coming from China.
Jose: From China, yeah. And, in fact, they're almost exporting deflation.
Damian: Yeah, exactly.
Jose: Yeah.
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Announcer: Thanks for listening in to part two of the Third Quarter Equity Roundtable on the Breadth of Experience Podcast. Stay tuned for part three, coming out shortly. Please share this with a friend or colleague. Follow, like, or comment on your preferred app, or send us an email at the address listed in the description. This podcast was hosted by Jose Alancherry and features Damian Fernandes and Ben Gossack.
This podcast was produced by Marco Vidovich with help from Ruben Garrido, George Subotic, Joyce Leung, and Bianca Sampson. The information contained herein is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax, or investment advice. Particular investment tax or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
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Unless otherwise indicated, such view is of the date noted and is subject to change. Information about the portfolio of holdings, asset allocation, or diversification is historical and is subject to change. This document may contain forward-looking statements, or FLS. FLS reflects current expectations and projections about future events and/or outcomes based on data currently available.
Such expectations and projections may be incorrect in the future, as events which were not anticipated or considered in their formulation may occur and lead to results that differ materially from those expressed or implied. FLS are not guarantees of future performance. And reliance on FLS should be avoided. TD Global Investment Solutions represents TD Asset Management Inc and Epoch Investment Partners Inc. Both entities are affiliates and wholly-owned subsidiaries of the Toronto-Dominion Bank.
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