Will the Fed Buy Stocks? (EP.473)

Episode Summary

Executive Summary: Michael and Ben covered a wide-ranging market and culture episode: bank earnings and IBM’s sharp drop, cooling inflation and the meaning of higher rates, AI/hyperscaler capex and whether the bubble is really in spending rather than stocks, improving valuations and earnings resilience, the market’s growing importance in household wealth and policy, and several media/lifestyle segments on reading, streaming, GLP-1s, and status symbols. The tone mixed humor with a generally constructive but cautious view on equities and bonds.

Main Topics: Banks, IBM, inflation, and rates (Priority: 5/5): They opened on big bank earnings and IBM’s 23% premarket drop, then debated whether higher yields and inflation are truly alarming or simply a normal regime. Their view was that 10-year yields near 4.5%-5% are historically ordinary, and that market panic around rates may be overdone. AI capex, hyperscaler cash flow, and bubble concerns (Priority: 5/5): A central theme was the shift in free cash flow from hyperscalers to semiconductor firms, with concern that the real bubble may be in AI spending rather than stock prices. They discussed Meta’s low-priced AI model, hyperscaler competition, and whether firms may begin undercutting each other. Bullish vs. bearish case for equities (Priority: 5/5): Ben walked through 10 reasons to be bearish, but the discussion concluded that the bullish case is stronger because many bearish risks are hypothetical rather than current realities. They emphasized that valuations across much of tech are not obviously stretched and that earnings have been surprisingly resilient. Market breadth, valuations, and earnings durability (Priority: 4/5): They cited strong breadth outside tech, all-time highs in equal-weight and advance-decline measures, and argued that forward earnings estimates are usually reliable outside recessions. The real bearish case would likely require an actual recession and a sharp earnings reset. Stocks as a dominant household asset and policy implications (Priority: 4/5): The hosts discussed how equities have become a larger share of household net worth than real estate and argued this is the new normal. They also entertained the idea that the market is now so important that policymakers may respond faster to market declines, potentially even through direct intervention. Media, reading, and changing consumer behavior (Priority: 2/5): A long side conversation covered the decline of reading for pleasure, the rise of audiobooks and podcasts, and how streaming models affect audience retention. They also discussed YouTube usage, HBO vs. Netflix release strategies, and how modern entertainment crowds out reading. Lifestyle, consumer signals, and GLP-1 effects (Priority: 2/5): The episode ended with personal anecdotes about status symbols, neighborhood waves, concerts, and movie/TV recommendations, plus a note that GLP-1 use is surprisingly widespread and that snack and sweet sales may be under pressure.

Key Arguments: Higher interest rates are not automatically bearish; 4.5%-5% on the 10-year Treasury is historically normal and may reflect stronger growth or persistent but moderating inflation. The biggest risk in AI may be the capex cycle itself: hyperscalers are spending heavily, free cash flow is shifting to semis, and competitive undercutting could pressure profitability. A broad stock-market bubble is not obvious from valuations because forward P/E ratios for tech and NVIDIA’s valuation have improved even as prices rose. If the market becomes too important to household wealth and political stability, bear markets may become faster, more violent flash events that force policy responses. The strongest bearish argument likely requires a recession; outside recessions, analysts tend to estimate earnings reasonably well. Retail speculation may be less intense than it appeared earlier in the year, with post-COVID retail single-stock buying falling to new lows. Even small caps appear partially tied to the AI cycle, suggesting the AI trade is broader than just the Mag 7. Books remain valuable for deep thinking, but audiobooks, podcasts, and LLMs are more efficient for most modern learning and information consumption. The cultural shift toward binge streaming weakens word-of-mouth and may help explain why Netflix seasons lose momentum compared with weekly-release shows. GLP-1 adoption and health-conscious behavior may be contributing to weakness in sugary snacks and other indulgent consumer categories.

Data Points: IBM premarket move: Down 23% - Referenced as a surprisingly large decline after disappointing results IBM market cap: $270 billion - Used to argue the stock still matters despite dismissive reactions 10-year Treasury yield: Around 4.5% - Used as the current benchmark rate for mortgages and broader financial pricing 10-year Treasury historical average: 5.8% - Cited to support the idea that current yields are not historically extreme Inflation rate peak mentioned: 4.2% - Used in the rate/inflation discussion as the prior high point Inflation rate current mentioned: 3.5% - Cited as cooling from the prior peak Bespoke chart average absolute daily change in stocks index: 3.36% - Used to show hyperscaler/AI stocks are moving at crisis-like levels Momentum factor selloff: One of the largest three-week sell-offs on record - Mike Saccardi tweet cited as evidence that momentum stocks have been hit hard SP 500 X Technology Index: Closed at a new all-time high - Used to show breadth outside tech is strong Advance-decline lines for S&P 500, 400, and 600: Fresh all-time highs - Evidence of broad market participation beyond the tech sector Micron EPS estimate: From $9 in January 2025 to $135 today - Illustrated the magnitude of earnings revisions in memory/semiconductor names Forward earnings estimates accuracy: 67% of the time within 5% - Cited to argue analysts are usually decent at forecasting earnings outside recessions U.S. household exposure to equities: Record high - Joe Wiesenthal chart discussed to show stocks dominate household balance sheets Stock market share of household net worth: Greater than real estate - Used to argue equities are now the primary household asset U.S. adults currently taking GLP-1s: 11% - Gallup survey figure referenced as surprisingly high Retail net single-stock buying: New post-COVID low - Vanda Research data used to question the idea that retail is fully euphoric Retail single-stock buying vs. prior period: 1-week rolling net buying down to a post-COVID low - Used to show retail appetite may be fading Reading for pleasure: Down from 28% in 2004 to 16% in 2023 - American Time Use Survey data cited in the discussion of reading decline Daily newspaper reading among 20-somethings: Less than 10% today vs. about 50% in 1975 - Used to show the collapse of old information habits Spending on sweet snacks: Down 17% - Discussed as a possible effect of GLP-1 adoption and changing consumption habits U.S. snack sales: Down 4% in the past four years - Used to support the idea that snack consumption is weakening Firefighter salary (BLS median): $59,000 per year - Referenced in a listener email debate about public-sector compensation Firefighter pay in California: $83,000 median; top 10% around $140,000 - Used to contextualize the pay discussion

Pivotal Quotes: "The longer the base, the higher in space." — Michael: Used humorously while discussing range-bound interest rates and technical analysis on yields "Investors keep chasing performance, but they never seem to catch it." — Jason Zweig (quoted by hosts): Used in the discussion of investor behavior gaps and performance-chasing "If you really want to be bearish, I think you're banking on a recession." — Ben: Summarized the core conclusion of the bearish-vs-bullish debate

Implications: Listeners should take away that the market remains structurally strong but increasingly sensitive to leverage, capex, and recession risk. Breadth is improving, bonds look more attractive than in years, and policy may react faster to market stress.