Hyman: S&P 500 earnings are up 10% year over year

Summary of YouTube Video Transcript

Key Concepts:

• S&P 500 and Nasdaq 100 earnings growth
• US exceptionalism
• Fed independence
• Yield curve steepening
• Small caps
• Russell 2000 High Income ETF (ITRM)
• Rate cuts and their impact on small caps
• Income investing challenges

1. Market Reaction and Earnings:

• The speaker, Simeon Hyman, notes that the market reaction to recent events is not as significant as one might expect.
• He attributes this to strong earnings, stating that S&P 500 earnings are up 10% year-over-year and Nasdaq 100 earnings are up 34% year-over-year.
• This earnings strength contributes to "US exceptionalism," making the US market resilient despite global headwinds, referencing political uncertainty in France as a contrasting example.

2. Fed Independence and Market Impact:

• Hyman believes the relatively muted market reaction suggests that Fed independence is still largely intact.
• He cautions against wishing for a weakening of Fed independence, noting that even a slight perception of deterioration can lead to a sell-off in the long end of the yield curve.
• He emphasizes that the Fed primarily controls the short-term lending rate. Lowering this rate too much can lead to a yield curve steepener, where longer-term interest rates rise.
• He points out that the last round of rate cuts resulted in higher longer-term interest rates.

3. Yield Curve Dynamics:

• The discussion references a spike in the two-year and ten-year yield curve.
• The Fed has the most influence over the two-year yield, which has decreased by approximately 70 basis points from the previous day.

4. Small Cap Investment Thesis:

• Hyman's "word of the day" is "small caps."
• His specific pick is the iShares Russell 2000 High Income ETF (ITRM), a small-cap income-focused ETF.
• The rationale for this pick is twofold:
  • Rate Cut Benefit: He believes the Fed has room for two or three rate cuts without significantly impacting the long end of the curve, as this is consistent with even 3% inflation. These rate cuts would disproportionately benefit small caps because they are more leveraged and have shorter maturities.
  • Income Investing: Lower rates on money market accounts create challenges for income investors, making high-income small-cap ETFs more attractive.

5. Rate Cuts and Small Caps:

• Hyman argues that small caps are more sensitive to interest rate changes due to their higher leverage and shorter debt maturities.
• Therefore, rate cuts would provide a greater boost to small-cap companies compared to large-cap companies.

6. Conclusion:

• The main takeaways are that strong earnings are supporting the US market, Fed independence is still perceived to be largely intact, and small caps are poised to benefit from potential rate cuts and the challenges facing income investors in a low-rate environment. The ITRM ETF is presented as a way to capitalize on these trends.