Stocks, SpaceX, and Subways

Episode Summary

Executive Summary: The episode first checks the labor and inflation releases, arguing the May jobs surge was likely a seasonal-adjustment issue rather than the World Cup, while inflation looks more persistent than hoped: core CPI stayed moderate, but PPI and intermediate prices signal broader pass-through ahead. The bulk of the show features Jim Labenthal on market valuation, AI, concentration risk, froth, investing discipline, private credit, and why today’s tech/AI cycle still has runway but may spread gains beyond megacap stocks.

Main Topics: May jobs report and the World Cup hypothesis (Priority: 5/5): The hosts revisit criticism that they ignored the World Cup as a possible driver of leisure/hospitality job gains. Matt Collier argues the bigger swing likely reflects seasonal adjustment, noting the not-seasonally-adjusted gain looked normal versus prior Mays and that event-related hiring usually peaks closer to the event. Inflation report: core looks manageable, pipeline looks hotter (Priority: 5/5): The discussion contrasts relatively tame core CPI with much hotter PPI and intermediate input prices. The core measure did not worsen much in May, but producer-side price pressures suggest consumer inflation may firm over coming months as energy and supply-chain effects filter through. Inflation and Fed policy outlook (Priority: 4/5): Matt’s interpretation implies headline inflation remains well above target and the Fed has little reason to cut soon. The conversation turns to the possibility of rates staying unchanged for a prolonged period or even a hike by year-end if inflation remains elevated. Market valuation, PEG ratios, and earnings growth (Priority: 5/5): Jim Labenthal argues the market is not cheap but is not necessarily in a broad bubble. He focuses on forward earnings, PEG ratios, and the idea that high multiples can be justified if earnings growth remains strong, though he acknowledges expectations are very aggressive. AI boom: not a bubble yet, but cyclical and crowded (Priority: 5/5): Labenthal says AI resembles a real investment cycle rather than a classic dot-com-style bubble because current compute demand is being absorbed profitably. Still, he sees eventual cyclicality, rising price discipline, and possible pressure on AI application-layer companies as the market matures. Concentration risk and equal-weight positioning (Priority: 4/5): A major concern is the narrowness of market leadership, with technology dominating the cap-weighted S&P 500. Labenthal says Sarity Partners prefers a thematic allocation to the equal-weight S&P 500 to reduce concentration and allow other sectors such as financials, industrials, energy, and materials to catch up. Investor behavior, discipline, and the role of advice (Priority: 4/5): The conversation emphasizes staying invested, matching risk tolerance, and avoiding the temptation to switch styles or chase momentum. Labenthal argues younger investors are more speculative, but most will mature after learning hard lessons from trading, leverage, and short-dated options.

Key Arguments: The World Cup likely does not fully explain May’s leisure/hospitality job gains because the not-seasonally-adjusted increase was not unusual versus prior years and event hiring typically shows up closer to the event. Core CPI’s mild May reading is less reassuring once PPI and intermediate prices are considered, because upstream price pressure suggests higher consumer inflation later in the summer. Headline inflation around 4% and core PCE around 3.4% leave the Fed well above target, making near-term rate cuts hard to justify. The market is expensive in absolute terms, but valuation can still be defensible if forward earnings growth is strong enough to bring the PEG ratio toward or below 1. AI is not yet a bubble because new compute supply is being absorbed by real demand and is currently profitable, unlike late-1990s fiber-optic overbuild. Concentration in a few megacap AI stocks is a real risk; one way to address it is to use equal-weight rather than market-cap-weighted exposure. The rest of the market may outperform if AI-driven capex spreads benefits to financials, industrials, energy, and materials. Investors should prioritize staying invested and aligning portfolios with their true risk tolerance; otherwise they risk panic selling and permanent loss. Private credit is not viewed as a systemic threat, because public BDC problems do not necessarily generalize to the broader private-credit market and gating can reduce fire-sale risk. Long-term productivity gains, potentially aided by AI, are the best route to stronger growth without proportionate inflation and could help support higher asset values and manageable yields.

Data Points: Headline CPI (May, year over year): 4.3% - Top-line consumer inflation rate discussed at the start of the inflation segment Core CPI (May, year over year): 2.9% - Inflation excluding food and energy PPI month-over-month (May): 1.1% - Producer prices rose sharply in May PPI year over year (May): 6.4% - Producer inflation reached a level described as reminiscent of 2022 Headline PCE (projected for May): 4.0% - Expected reading based on CPI/PPI inputs Core PCE (projected for May): 3.4% - Expected Fed-preferred inflation measure Core CPI 6-month pace: over 3% - Matt noted the recent trend remains too hot even if one month looks mild PPI excluding food, energy, and trade services: 0.8% m/m - Highlighted as an especially concerning upstream price pressure Forward P/E for the S&P 500: 22x - Labenthal’s market valuation reference point Projected S&P 500 earnings growth: 23% - Used to argue the market can grow into its valuation NVIDIA forward P/E: 24x - Discussed as the AI bellwether NVIDIA expected earnings growth: 40% - Used in PEG ratio discussion NVIDIA PEG ratio: 0.6 - Labenthal argued this looks cheap on a growth-adjusted basis Technology weight in market-cap S&P 500: almost 40% - Used to explain concentration risk Technology weight in equal-weight S&P 500: about 15% - Illustrated the diversification benefit of equal-weighting Atlanta Fed GDPNow Q2 estimate: 3.3% - Referenced by Labenthal as an example of still-strong growth 10-year Treasury yield: 4.5% - Discussed in the context of debt, deficits, and productivity Private credit market size: $2.0-$2.5 trillion - Estimated scale of the asset class Private equity AUM ahead of private credit: about $10 trillion - Used to argue private credit would be impaired only after larger-capital-structure stress SpaceX valuation: almost $1.8 trillion - Discussed as overly expensive SpaceX capital raise: $75 billion - Described as the amount being raised in the IPO process SpaceX sales multiple: 90x sales - Cited as a valuation that historically produces poor future returns Suggested monthly change in gas prices in June: roughly $450/gallon to about $4.20/gallon - Used to imply a weaker energy contribution to June CPI Probability of a rate hike by December: 60% - Chris cited futures pricing for a possible hike by year-end

Pivotal Quotes: "The gain was not an outsized gain compared to prior years, which suggests that the big plus 70,000 in leisure hospitality is a seasonal adjustment issue going on." — Matt Collier: Explaining why the World Cup likely does not fully explain the May jobs surge "I think the broad story of the week when it comes to inflation data... is concerning... these price pressures are working their way through to consumers." — Matt Collier: Summarizing the inflation reports and the pipeline from producer prices to consumers "I don't think it's overly expensive... if we compare [valuation] to the growth rate of earnings." — Jim Labenthal: Arguing that high market multiples can be justified by strong expected earnings growth

Implications: Inflation looks stickier than hoped, reducing the case for near-term Fed easing. Markets may stay volatile as AI leadership, concentration risk, and fresh equity supply are digested, but broad participation could emerge if AI capex lifts other sectors and productivity improves.