This Won't End Well (EP. 464)

Episode Summary

Executive Summary: Ben Carlson’s book launch and the duo’s broad market check-in anchor an episode that argues the current stock melt-up is unusually rational: earnings growth, not just speculation, is driving high valuations. They contrast that with real AI disruption in jobs, training, and consumer behavior, while also touching on GLP-1 effects, wealth transfer, advisor commoditization, and personal tech/TV-life anecdotes.

Main Topics: Ben Carlson’s new book, Risk and Reward (Priority: 5/5): Ben explains the book’s thesis: investors need both risk context and reward perspective, with chapters designed as yin and yang. He says it distills 12+ years of writing into a concise, chart-heavy guide for both overly cautious and overly aggressive investors. The stock market’s 'melt-up' and why this one feels different (Priority: 5/5): Michael and Ben argue the rally looks stretched but is supported by strong fundamentals, especially earnings growth in large-cap tech and semis. They discuss whether the current bull market resembles historical melt-ups, while emphasizing that valuations are not as absurd as they appear. Semiconductors, AI demand, and market concentration (Priority: 5/5): They focus on Micron, Sandisk, SK Hynix, Samsung, and the broader semiconductor complex as the new drivers of market returns. The claim is that AI-driven compute demand is powering both stock price explosions and still-reasonable earnings multiples. AI’s impact on work, training, and social stability (Priority: 5/5): A long segment explores how AI may hollow out entry-level jobs, reduce apprenticeship learning, and create a generation of workers with less on-the-job training. They also discuss how AI is changing white-collar work, customer support, and advisor-client dynamics. Consumer behavior, GLP-1 drugs, and the K-shaped economy (Priority: 3/5): They note that GLP-1 adoption is reducing alcohol and snack demand, hurting beverage stocks, while Disney’s earnings call suggests affluent and upper-middle-income consumers remain resilient. This reinforces their view that the economy is still K-shaped and uneven. Personal tech habits, productivity, and life updates (Priority: 2/5): The episode includes lighter segments on blocking apps with a 'brick' device, group chats, sleep masks, Peloton, movie recommendations, and a Chipotle refund handled by an AI agent. These anecdotes reinforce the broader theme of behavioral change driven by technology.

Key Arguments: The current rally is not just speculative 'melt-up' behavior; it is increasingly backed by robust earnings growth, especially in semiconductors and AI-linked companies. A bubble should mean prices that future earnings cannot plausibly justify; several 'hot' AI/semiconductor names still trade at sub-10x forward earnings despite enormous price gains. The market is more volatile now, so future drawdowns may come in sharper 1-3 month bursts rather than long, grinding bear markets. AI is already reducing entry-level hiring and eliminating the learning-through-grunt-work model that has traditionally trained junior professionals. If AI capex were to roll over sharply, it would likely signal broader economic weakness and potentially a recession, not just a stock-market correction. GLP-1 adoption is already changing consumer spending patterns, particularly in alcohol and some food categories, with large implications for consumer staples and beverage companies. Simple portfolio construction is becoming commoditized; advisors will need judgment, differentiation, and relationship skills as AI and model portfolios improve. The wealth transfer will first be from men to women through longevity, then to heirs later; firms should prepare for women controlling more assets sooner than many expect.

Data Points: S&P 500 gain: 16% in six weeks - Used to describe the speed of the recent market rally following easing war-related fears. NASDAQ 100 10-year gain: Nearly 650% - Compared with historical bull markets to argue the current run is extraordinary. Micron year-to-date gain: 180% - Presented as an example of a stock soaring while still trading at a modest multiple. Micron 1-year gain: 800% - Illustrates the scale of the semiconductor melt-up. Micron forward P/E: 9.7x 2026 earnings - Used to argue the stock is not priced like a traditional bubble despite huge appreciation. Sandisk forward P/E: 11.5x 2026 earnings - Another example of a highly appreciated stock still priced at a relatively low multiple. Micron/Sandisk 2027 earnings multiples: 7x and 8.4x - Supports the claim that the market is discounting continued growth. S&P 500 forward P/E: 21x - Noted as below January 2025 levels even though the index is up about 30% since then. S&P 500 PE ratio change YTD: Down 4% - Despite the index being up roughly 8% this year, valuations compressed because earnings grew faster. Semis as share of S&P 500 market cap: 22% - Bespoke chart cited to show how large semiconductor stocks have become within the index. Semis share at end of April 2025: 6% - Shows how fast semiconductor weight in the S&P 500 expanded over about a year. South Korea market ranking: 7th largest stock market in the world - South Korea surpassed Canada and the UK, underscoring the global AI-led re-rating. EWY / South Korea 10-year gain: ~250% - Ben notes nearly all of the gain occurred in the past year. Emerging markets rally: 23% in the last six weeks - Cited as part of a broader global AI and tech-driven surge. U.S. deficit: 6% of GDP - Used in the argument that fiscal deficits support corporate profits rather than just signal instability. 2000 U.S. surplus: 2% surplus - Contrasted with the current deficit to show how different today’s macro backdrop is from the dot-com era. Hyperscaler AI spending: $800 billion this year; $1.1 trillion next year - Referenced in the AI capex discussion and the potential economic impact if spending slows. AI capex share of GDP: 3.3% - Next year’s projected spending was said to exceed defense spending. GLP-1 usage in U.S. adults: 5.8% to 12.4% - Gallup figures cited to show rapid adoption of weight-loss drugs. Alcohol consumption response: ~50% reduction among prior drinkers - A study of 14,000 Weight Watchers members showed a large decline after starting GLP-1s. Weight-loss industry losses: $830 billion+ - Market value shed by top-listed beer, wine, and spirits makers since 2021 due to GLP-1 fears. Longer-life probability: 64% chance a 65-year-old couple has at least one partner live past 90 - Used to explain why retirees are reluctant to spend down savings. Current market cap of a 65%? No exact figure: Not provided - No specific total was given; the discussion centered on transfer timing and longevity risk. Retail investor flow percentile: 98th percentile weekly flow since 2019 - Citadel-related data showing strong retail participation despite pockets of caution.

Pivotal Quotes: "The efficiency gain and the training loss are the same decision viewed from different angles." — Ben Carlson (quoting Bailey Gifford piece): On AI automating junior work while reducing apprenticeship and skill development. "I think this is the melt up that makes the most sense in history." — Michael Batnick: On why the current rally feels extreme but is supported by strong fundamentals and earnings. "A bubble is yes, when a situation where the future cannot possibly explain the present." — Cliff Asness (quoted by Ben Carlson): Used to distinguish true bubbles from stocks that are merely expensive or volatile.

Implications: Listeners should expect more volatility, sharper sector rotations, and deeper AI-driven labor disruption. Investors and advisors will need rules, humility, and adaptability as earnings, technology, and consumer behavior reshape markets and careers.