As stocks come under pressure ahead of the highly anticipated Big Tech earnings week, FS Investments Chief Market Strategist Troy Gayeski joins The Morning Brief to discuss the implications for investors.
Gayeski attributes the sell-off to "stronger economic growth, leading to stronger inflation," which has resulted in the pricing out of expectations for Federal Reserve rate cuts. However, he notes that "there's nothing really disastrous in terms of fundamentals."
With the earnings season in full swing, Gayeski believes divergence will emerge as the main theme. He pointed to the fracturing of the once-cohesive "Magnificent Seven" group of tech giants, with names like Tesla ( TSLA) and Apple (AAPL) falling behind, while Nvidia ( NVDA) and Microsoft (MSFT) continue to thrive. Gayeski characterizes this divergence as "a healthy development for markets."
When asked about how investors should position their portfolios amid the sell-off, Gayeski emphasizes that "the biggest challenge for investors right now isn't necessarily should they rotate more risk into the Magnificent Seven or megacap tech; it's how to put the massive cash hoards to work that they've built."
- We want to bring in Troy Gayeski. He is FS Investment's Chief Market Strategist. Troy, we're going to join you at the desk here in just a minute. But first, just your take on some of that selling action that we've been seeing in the markets right now. Why shouldn't investors be too worried?
TROY GAYESKI: Well, big picture, right? What is driving the sell-off? Its stronger economic growth, leading to stronger inflation, leading to bond market participants pushing back the expectation for Fed cuts, which were somewhat delusional to start with. So there's really nothing disastrous in terms of fundamentals. Earnings growth looks significantly powerful. However, higher yields should mean lower multiples, which is what we're seeing now.
- I tried to remember that stat from FactSet off the top there, but I needed my paper to be able to reference exactly what they were laying out there, Troy. And kudos to you too, unfettered concentration as we were making our way over to the desk here as well here. As we're thinking about this earnings season, what is one huge theme that you expect to emerge?
TROY GAYESKI: Well, I think it's divergence, right? So you think of a lot of the rebound from October 22 to really end of last year, very concentrated magnificent seven. Every company, for the most part, Tesla may be an exception was doing very well. And this year, you've seen much more significant divergence, right? Apple, which has obviously been a juggernaut, hasn't performance as well. Tesla's been a borderline trainwreck.
But then on the other side, you have NVIDIA just monetizing the AI boom, which is something we've never really seen. In history, there really hasn't been a company like NVIDIA that has grown market cap so fast, but has grown earnings faster. Really, really remarkable. So the divergence, that's a healthy development for markets.
- Should investors be looking at some of the selling that we were looking at last week and seeing that as a buying opportunity? When you take a look at overall, the NASDAQ here coming off what was extremely terrible week here, worst week that we've seen in quite some time. Is that an entry point?
TROY GAYESKI: Yeah. I think you have to be a little careful in the short term because what's really driving markets again is the back end of the Treasury curve. And when you think of the limitless issuance that's going on, you think about the fact that inflation is persisting, it's very easy to imagine a 10-year breaching 5%. Remember, 5% was the limit we hit last year.
So I think you want to be cautious in the short term. But when you look through the magnificent seven, you know, NVIDIA is obviously a clear winner, Amazon, Microsoft. So if you missed the upside and you need to add more mega-cap beta, that might be a good thing to start with. However, just be cautious, right? Because we could certainly fall another 5% to 10% in the NASDAQ here.
- Interesting. OK. And so how much of a catalyst, one way or the other, is the Fed and the decision making that comes now, not even just in June, but going into the third quarter of this year?
TROY GAYESKI: Yeah. So as usual, the Fed is the most powerful financial institution in the world, right? And the interplay between Fed policy, money supply, Treasury valuations, always very critical. If the S&P was 16 times forward earnings, wouldn't matter as much. But we got back up to 21 times forward earnings. And even with strong earnings growth and a powerful economy, you can get multiple compression into elevated yields, which is exactly what we're seeing now.
- So, Troy, what should investors then be doing if they need to be cautious on some of these large cap tech names, especially here in the short term? What kind of changes or what kind of adjustments should they be making to their strategy, if any?
TROY GAYESKI: Yeah. Well, look, I think the biggest challenge for investors right now isn't necessarily should they rotate more risk into the magnificent seven or mega cap tech? It's how to put those massive cash hoards to work that they've built, right? So you've built up over 2 and 1/2 trillion dollars in money markets since the pandemic. T-bill ownership is off the charts.
So one of the best things to do right now is look for alternatives you can embrace where you're meaningfully increasing your return without taking uncomfortable levels of risk, right? And by uncomfortable levels of risk, it was a reminder of the last two weeks that if you're adding risk at elevated valuations, you can walk into a meaningful correction. Who needs the volatility? If you can make high single digits or low teens, there are many democratized options now you can pursue.