Branch: Thinking this is a bottom is a misnomer—we'll see uncertainty ahead

Key Concepts:

• Tradable bottom: The idea that the market has reached its lowest point and is poised for a sustained upward trend.
• Earnings revisions: Changes in analysts' expectations for company earnings.
• Earnings growth: The rate at which a company's profits are increasing.
• Tariffs: Taxes imposed on imported goods.
• GDP Growth: The rate at which a country's economy is growing.
• SaaS: Software as a Service
• AI: Artificial Intelligence

Market Bottom and Uncertainty

• Greg does not believe the market has reached a tradable bottom due to ongoing uncertainty.
• He anticipates continued volatility in the coming quarters, hoping for a pattern similar to 2023, where performance improved in the later part of the year.
• The absence of solid policy and the unquantified impact of various policy initiatives, including tariffs, labor supply, and tax cuts, contribute to this uncertainty.

Factors Influencing Market Volatility

• Mike Wilson (Morgan Stanley CIO) attributes market declines over the past 3-4 months primarily to rolling over of earnings revisions, the Federal Reserve pausing rate cuts, stricter immigration enforcement, and Doge, all of which are growth-negative factors.
• Greg agrees that factors beyond tariffs are at play, including a shrinking labor supply and lowered earnings growth expectations (from 11% to 7% for the S&P).
• However, Greg disagrees with the assertion that tariffs have "nothing to do with" the volatility, arguing that the Fed's change in posture was partly driven by tariffs and their implications.

Investment Strategy in the Current Environment

• Mike Wilson favors software and financials as key portfolio components in the current environment.
• Greg's investment philosophy is to focus on sectors with strong growth potential, even amidst macro and policy challenges.
• He agrees that software (SaaS, AI, cloud, cybersecurity) is a good choice due to its relative immunity to macro factors and tariffs.

Dollar's Impact on Earnings Season

• The dollar has weakened by about 3% month-to-date.
• Greg emphasizes that the impact of tariffs on GDP growth is a crucial factor.
• If tariffs significantly reduce GDP growth, then concerns about earnings season are warranted.
• Continued degradation in analyst expectations and consumer sentiment would also negatively impact earnings.

Conclusion

The market's current state is characterized by uncertainty, making it difficult to call a bottom. Factors beyond tariffs, such as earnings revisions and labor supply, are significantly influencing market volatility. A sound investment strategy involves focusing on sectors with strong growth potential, like software. The ultimate impact of tariffs on GDP growth will determine the level of concern regarding earnings season.