Tech Pushes Higher Despite Trade Tensions

Key Concepts

• Fundamentals: The underlying economic and financial health of a company or market.
• Valuations: The process of determining the current worth of an asset or company.
• Earnings Season: A period when publicly traded companies release their financial results.
• Tariffs: Taxes imposed on imported goods.
• Megatrend: A significant and lasting change in the behavior of consumers or the economy.
• MAG 7: Refers to the seven largest technology companies in the market (often including Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla).

Market Fundamentals and Returns

The discussion centers on the current market environment, particularly concerning the impact of geopolitical headlines, specifically those related to China, on investment returns. The speaker, representing an entity with $10 billion in assets under management, emphasizes that despite headline risks, the underlying fundamentals of the market remain strong.

Key Points:

• Strong Demand: Recent reports from ASML and TSM, as well as Oracle's Investor Day, indicate very strong demand, which is a positive sign for market fundamentals.
• Returns Driven by Fundamentals, Not Valuations: A significant observation is that returns in the top-performing segment of the market have not been driven by increasing valuations this year. Instead, they are attributed to increased demand and continued high earnings growth.
• Valuations at or Below Historical Levels: For many large-cap companies, valuations are currently at or below historical averages, even at the beginning of the year. This suggests that the market is not in a bubble, and the strong price trends are supported by robust fundamentals.
• Investor Sentiment: The speaker believes that strong fundamentals supporting price trends are a more sustainable and positive position for investors to be in, rather than returns being solely driven by increased investor optimism leading to inflated valuations.

China Trade Tensions and Market Impact

The conversation addresses the ongoing trade tensions between the US and China and their potential impact on companies with significant exposure to the Chinese market.

Key Points:

• Market Desensitization: The market has become somewhat desensitized to the back-and-forth nature of tariff negotiations.
• Base Case: A Deal: The speaker's base case is that a deal will ultimately be reached, citing President Trump's apparent desire to make a deal.
• Headline Volatility as Risk Premium: The observed headline volatility is seen as a necessary component for the realization of a risk premium.
• Companies Calming Anxieties: Companies like Tesla, Apple, and ASML are mentioned as having managed to calm anxieties by demonstrating their ability to continue seeing megatrends unfold even if demand from China were to decrease.
• Anxiety for High China Exposure: The question remains whether companies with high exposure to China should be anxious, but the prevailing sentiment is that the market has navigated this risk with "fits and starts" over the past six months, suggesting a degree of resilience.

Earnings Outlook and Sector Performance

The discussion shifts to the upcoming earnings season and where earnings are expected to "catch fire," particularly within the "MAG 7" group of large technology companies.

Key Points:

• Divergence within MAG 7: There is a significant divergence in performance among the MAG 7 companies this year.
• Laggards and Winners: Companies like Tesla, Apple, and Amazon, which have been laggards within the MAG 7, are expected to remain so in the medium term. Conversely, the current winners within this group are likely to continue their strong performance.
• Software and Services Challenges: A contributing factor to this divergence is that many smaller software and services companies have struggled to differentiate themselves and demonstrate unique value propositions. This has led the market to default to investing in established "air winners" (companies with proven success).
• Continued Strength for Leaders: The speaker reiterates that even within the MAG 7, the companies that have been performing well are poised to continue their success, while the laggards are likely to remain so in the medium term.

Conclusion and Takeaways

The overarching message is one of cautious optimism, grounded in strong underlying market fundamentals. Despite geopolitical noise and headline risks, the market's performance is being driven by genuine demand and earnings growth, rather than speculative valuation increases. While trade tensions with China are a factor, the market appears to be adapting, and the expectation of a resolution remains a key assumption. Within the technology sector, a clear divergence exists, with established leaders expected to continue their outperformance, while smaller, less differentiated companies may struggle. The current valuation levels for many large companies are seen as attractive, supported by their fundamental strength.