Episode Transcript
The Finance Ghost: Welcome to episode 271 of Magic Markets. We are very much in a holiday week in South Africa. It's a public holiday Monday; public holiday Friday. So, if you are listening to this, thank you for making some time for us in a week of rest (for most people). We'll try and keep this one short and sweet.
Moe, something that is not short right now is the US market. In fact, you want to be very long or at least that's what you wanted to be up until now - because the S&P 500 is at all-time highs. It's almost like there's no war in the Middle East, isn't it?
Mohammed Nalla: Isn't that just remarkable, right? Firstly, let me just say I'm jealous this week of South Africans who get the two public holidays. No such thing up here in Canada. So, it’s very much a work day for us up here.
But if you look at markets, they're not taking a holiday either. As you say, the S&P 500 is at all-time records. The Dow (Jones) underperformed a little bit. We'll unpack that shortly.
But this has been very much a tech-led rally. We had all these concerns around valuations, around AI. We had a little bit of a sell-off in that sector. And then when it bounced, it really bounced back very sharply.
So, if you look at the NASDAQ and the S&P 500, those have been the two indices that have just shot the lights out. The broader equities complex in the US seems to be slightly more tepid. It's still a pretty strong performance.
But this is telling you that those concerns that we had earlier this year (even into the latter part of last year if you go back slightly further), those concerns around a very concentrated rally in the US have come firmly back onto the front of the agenda. Because this is a rally that's being led by the AI trend.
You're seeing semiconductors, semiconductor manufacturers – those have been remarkably strong. And we can unpack some of this performance. We can unpack what's been happening in the sectors.
And then Ghost, I've got some pretty interesting data - just in terms of where we are in the US earnings season. Because at the moment, we've just gone into this current quarterly earnings season. Around 25% of the S&P 500 have reported thus far.
And at the time of recording this - in fact just this week - we've got some very heavy hitters reporting. We’ve got five of the Mag Seven stocks: Amazon, Meta, Microsoft - the big names.
But we've also got Coca-Cola reporting this week. We've got Visa, we've got MasterCard. So, there are some pretty chunky results coming out.
At the latter part of this week, probably after this podcast goes live, we’ll also have results out of some of the world's energy majors. You've got ExxonMobil, you've got Chevron. So, it's really a very interesting week to have a look at those earnings, because remember, what you've got to do is join all of the dots.
What are these companies experiencing from the bottom up? Does that plug into the macro narrative? Is it all making sense or not? There’s certainly lots for us to digest.
The Finance Ghost: Yeah, absolutely. And we do this at a time where Nvidia is up around 10% year-to-date, and Microsoft is down 10% year-to-date. So that's exactly why we're doing it. As much as the S&P is at record highs right now, the reality is that, yes, if you owned the index, you are enjoying that for sure, but you could have been in some really big names and actually not have done so well year-to-date.
And that's the importance of obviously digging deeper and seeing what's in there. Because like you say, AI has been a major driver, but actually, only at the back of the value chain. Not necessarily at the application layer, unless you've had one or two of the ones that have done really well.
It's very much been a season of highs and lows at stock specific level, despite the index looking so strong.
Mohammed Nalla: Yeah, I think you raised some very important points. Because not everything's at record highs. It really does depend on what are you using, in terms of your time frame.
Because if we look at it over just the last week, Microsoft is kind of flat. If you look at it over the last month, Microsoft is up in the double digits, but that's because it sold off very sharply.
And then like you say, on a year-to-date basis, there are some pretty different numbers coming out. So, a nice way to look at this is, what's happened on the latest quarter from an earnings growth perspective - and then what the stock has done.
Now, at the time of this recording, we're awaiting Microsoft results (coming in another two or three days). So, we will see that in the latest earnings. But if we go back to the previous quarter, Microsoft still reported some very strong earnings growth, but over that same quarter it's down, as you say, around 10%.
So it is a product of how optimistic is the market getting on specific names, how much of that optimism is priced in. And that is why it's so important to look at: what are the analyst expectations? What's the consensus out there? And does the stock actually beat, meet or disappoint on those expectations?
Because that tends to frame sometimes just the shorter-term moves. But sometimes over the longer-term; certainly, where there's a mega trend at play. A lot of that optimism gets baked in over several quarters, and so when it unwinds, it takes a little bit of a while before you see some sort of stabilisation.
Thankfully on Microsoft we have seen a little bit of that bounce come through. Now it's in stabilisation mode as I think the market eagerly awaits those results.
News breaking today: there’s a renegotiation between Microsoft and OpenAI in terms of their contractual relationship. So, it is a very fluid market, and there's a lot happening underneath the hood.
And that's why the work that we do in Magic Markets Premium also becomes so important. Because quite often, you've got to actually just lift the veil. Look at what some of the underlying drivers in the businesses that we cover, are. And are those sustainable? How much is just hubris and optimism? How much gives you a long-term investment thesis?
The Finance Ghost: What's also interesting is, if you have a look, Google Finance. It’s something that a lot of people would typically use for their charting. I don't know when I last used it, but they've now got this very fancy beta version of the new Google Finance. It's got lots of AI tools and everything else.
I like to test these things out as often as possible. And if you go and ask it, “What are the best performers and the worst performers year-to-date in the S&P 500”, your best performer is Sandisk, at least according to the Google AI, which is all the way up in the value chain.
Another surprising story (other than for techies who really understand exactly how the products all filter into the tech stack and the hardware and everything else for data centres, et cetera) - Intel however seems to be in the top five list. Yay! Very happy to own that. We're doing that this week in Magic Markets Premium which is cool.
And if you look at some of the worst names - and Moe this is relevant because recently we talked about the “SaaSpocalypse” - ServiceNow is in there; Workday is in there. A couple of your typical enterprise software names.
So, it's been remarkable that you can own names that have doubled year-to-date, and it's only April. Many big companies are down 40% year to date. It talks directly to the point around risk and reward when you play in single stocks, all the usual stuff around diversification, position, sizing, etc.
This year has been a great example of why that matters.
Mohammed Nalla: Just to delve into that Sandisk point, if you bifurcate the market, when you're looking at just the tech sector specifically, it's really been a stark contrast between software and hardware.
Because the stocks that have done really well have been in the semiconductor manufacturer space. If you look at semiconductor equipment, materials suppliers, everything in that value chain (let's call it the harder part of the value chain) has done remarkably well.
And then when you look at software, and it's not just the software application stocks that you've mentioned, for example Intuit (they're down quite solidly as well). You've mentioned a couple of names there.
It's not just the software application stocks that have come under pressure, but also the broader software infrastructure players. And that's where players like Microsoft, and Oracle come through quite strongly.
Interestingly enough, Palantir (that's a stock that I certainly don't cover and don't necessarily like that much) is also down on a year-to-date basis, around 19%. So, I think in that story between software and hardware, quite a defined trend that has come through.
But we've got to also broaden the lens because it's a big market. If you're looking at the S&P 500, you're not even looking at the Russell (Russell 2000 Index). But if you're looking at the S&P 500, you've still got 500 stocks to cover there. And that's across an entire range of sectors.
And so far on a year-to-date basis, in fact, you look at it over a month - whatever time period - defensives are a bit of a hit and miss. Because if you look at healthcare, there’s lots of pressure on some names there.
I mean there’s been that GLP trend that came through. Lilly, Novo Nordisk: they were all doing really well. Now those are all down in the solid double digits. So, I would say healthcare is standing out as a distinct laggard.
Whereas if you look at other consumer defensives, it really is very much dependent on when you're taking your measurement period.
If you do a year-to-date basis, consumer defensives like Walmart and Costco are up quite solidly. But more recently, there has been a little more pressure that has come through. Last week was pretty much a flat performance; even over the last month.
So, when you're looking at much shorter time horizons, it gets a little bit tricky simply because there's just been so much noise in the market. And as you mentioned in the intro, we've got a war going on.
The fact that you've got a war going on, means you've got oil prices at these very elevated levels, inflation concerns starting to come through. And yet the market can still pushing onto these record highs – that tells you that that either there's a lot of hubris in the system right now, or maybe there is some underlying growth that just keeps delivering.
And when I cover some of the stats - which I'm going to get into quite shortly in terms of what's happened on revenue, what's happened on earnings growth - we can try and unpack which sectors actually have some substance behind that rally.
The Finance Ghost: Absolutely. And the more we make an effort to understand what happens when stocks either beat expectations or miss them, the easier it is to understand things like what we've seen in South Africa in the past week.
In a stock like Clicks, for example. It has been the market darling for as long as anyone can remember. Lots of international shareholders. It's been “expensive” for a long time now.
And then finally, it feels like the market has woken up to this and said, “Actually, we don't want to own Clicks at a very high P/E (price-to-earnings ratio)”. And now suddenly that share price is under a whole lot of pressure. It had a really tough day on the release of earnings.
And yeah, sure, the outlook is maybe a little bit slower than what people are used to, but that sentiment changes really quickly. It goes from, “Oh, Clicks is a safe buy”, through to, “Oh, you know, Clicks has always been expensive and no one wants it, and it's too slow”, and “Why would you own a stock at this PE?”.
And it happens literally overnight. And that's how markets move 10% in a day, or certainly stocks move 10% in a day (I mean, markets can as well, but it's very rare). So, understanding the expectations - versus what's really coming through - is, of course, the trick, right? As you say, that's what drives the near-term moves.
Mohammed Nalla: Maybe just to delve into that just a little bit. I think it's also tied very strongly to: what are the growth expectations and then delivery on that growth from the companies?
Because if you look at Clicks, for example, you mentioned an elevated multiple. I don't know if the earnings growth has really been strong enough to justify that. Clearly not, if the market's been telling you what it's been telling you.
In a completely different sector, if you look at a stock like Capitec (a stock that I remember for the longest time just always looked expensive), everyone's like, “Oh, Capitec always looks so expensive”.
Yet over the last several years, they've just delivered that growth. Most recently, they're gaining market share. The ROEs (Return On Equity) are stronger than most of the other banks down there. They're broadening out their product set. So, when you look at that, the market's going to say, “okay, great”.
Some of this optimism that's baked into the valuation may well be justified. And so, for as long as the company can keep that growth treadmill going, the party can keep on going.
But that's where the delta gets larger. Because if you're consistently delivering on that growth story, the hurdle to beat just gets higher and higher and higher. And so, you just literally need one quarter where you marginally disappoint the market.
You can still deliver sequential quarter on quarter growth, but the market can say, “Hey, you know what? It's double digits, but it's not double digits enough”, or “It's not triple digits. We're going to punish you”.
It's really an analogy of sailing ever closer to the wind. That's what concerns me. Certainly, in the kind of backdrop we have, not just in US markets, but in other geographies as well.
The Finance Ghost: Moe, before I let you give us the data from the US side, I'm going to give you one quick stat on Capitec, just because you said the words “market share”.
So, I'm not going to ask you to guess. I'm just going to give it to you and to our listeners. Which is to say that between the ages of 18 and 35 (young adults), the Capitec market share is north of 50%. Which is objectively bonkers.
In a country that has multiple banks, more than half of young adults in South Africa bank with Capitec. It is not hard to see why the P/E is what it is. It really is not difficult to see.
Mohammed Nalla: That is unbelievable. I would not have even been close if you had asked me to guess.
The Finance Ghost: Right?
Mohammed Nalla: Because I would say: “South African big banks…”
The Finance Ghost: I didn't want to embarrass you. I thought I’d let you get away with it.
Mohammed Nalla: [Laughs]. You're cherry picking a specific metric now. I would never have gotten it over 50%. That's massive. And I must say, it's actually a shocking indictment on the rest of South Africa's fairly oligopolistic banking industry, right?
They're just resting on their laurels. This new incumbent came out a few years ago. If we go back, I remember sitting across the table from the CEO of Capitec. At that time, I was still at an investment bank down in South Africa. And we're talking about the results. I remember the stock being so expensive. That was everything in my head at the time.
Man, was I wrong, right? It just keeps on going up.
But back then, the edge Capitec had over all of the incumbents was that their tech stack was a lot newer. The incumbent banks were dealing with legacy tech. We sat inside a lot of these banks. We worked there. You could see that. And that was their key differentiator.
And then you obviously had some ripples being made in the market. I remember there was a time when First Rand (Bank) was perceived to be ahead on the tech stack, and so forth. But I think Capitec’s just done a couple of things right, and that's why your share price reacts the way it does.
It's not just the tech stack. They've done that. They broadened out the product offering. They understand their target market quite well. And I guess that's testament to the fact that they have greater than 50% market share of that specific demographic. Wow.
Let's not get too sidetracked on a single stock there, but that is remarkable. And kudos to the team down there.
The Finance Ghost: No, absolutely.
Okay, Moe, so I'm keen to hear the data from the US. Then bring us home with some cool stats on how it's been looking recently, and then we'll call it a day and let our listeners go and enjoy their public holiday week.
Mohammed Nalla: Just a couple of points, and not to go into too much detail. There is obviously a lot more detail if you want to delve into this. But looking at FactSet data specifically (and this will evolve as we go through the earnings season), at the moment, roughly a quarter of the S&P 500 have reported in the current earnings season.
Of that subset that has reported, 84% of the companies have actually beat on their earnings per share, versus the average - that's generally around 78%.
So that's telling you that there is earnings strength that has come through. It's decisively beating expectations. And the size of those surprises is also roughly one and a half times what the size normally is, in terms of the upside beat.
So that's not just marginal, it is a broad-based upside story that's come through, if you're looking at earnings strength.
Now the other important thing is, I know you always like to look at what sequential growth has done when we're covering a specific stock. And that's because of how the market's wired, right? We're wired into this quarterly reporting season.
We’re now looking at a sixth quarter of consecutive double-digit earnings growth in the US. On a blended basis, it's now running at around 15% year on year. That is a very long-term trend. Six consecutive quarters.
I would say that's really testament to the fact that the rally you've seen in US markets has been matched by a rally in the underlying earnings growth. What does that mean for valuations? Forward P/Es are around 21 times, pretty much in line with longer term norms, maybe slightly ahead.
And so that's what's remarkable is, we can be concerned around valuations on specific stocks, but even when you look at that across the broader market, the rally that you've seen has been matched by earnings growth. And I think that tempers some of the bearish narrative that comes through.
Obviously, yes, we're going into an era. Is it “sell in May and go away”? We don't know. I think with the kind of rally we've seen over the last two weeks or so, I would be cautious, tactically. Just over the very shorter term. Simply because when things rally in that kind of manner up in a straight line, you do see some profit taking come through.
Maybe “sell in May, go away” kind of works again, but again, lots of divergence in terms of whether that's something you should actually look at.
Then lastly, I just want to quickly have a look at: what does that look like on a sectoral basis? And on a sectoral basis, if you're looking at industry leadership, it's really come through in tech, no surprises there. Industrials have been okay. Financials and materials: that's where it's come through.
Interestingly enough, energy has been a bit of a drag. Again, that might actually come through as we lap and as we go into the current reporting - the energy majors are reporting at the end of this week, so let's see what's actually happening there.
But overall, if we're just looking at it over the last, let's call it Q1 2026, InfoTech is top of the list. And we're talking earnings growth specifically. I want to break up earnings versus revenue.
The key surprise for me is this. If you look at the earnings growth chart versus the revenue growth chart, Materials, which is effectively resources (you get chemicals in there, you get steel, you get a whole bunch of resources), were actually the second best performer on the earnings growth side. But when you're looking at revenue growth, they're at the lower end of the quadrant.
So that's been very interesting for me, in terms of: is that an efficiency story that's come through? It's not really a revenue story. So what's actually driving that earnings growth underlying that? Let's watch that as a potential trend.
And then the big surprises for me… I'm not surprised by technology leading. Financials, that's not a surprise. I think they've performed quite well. They're the number three spot on the podium, both on earnings growth as well as revenue growth.
The surprise has just been how lacklustre some of the performance is, certainly of the large financial stocks in the US. There have maybe been some concerns there around the Fed. This week we get a Fed decision.
It's Jerome Powell's last meeting that he's chairing, and then you've got Kevin Warsh's nomination, which should be decided quite shortly.
So maybe that's filtering through in terms of that financial sector. There are also some pretty wacky moves on the yield curve.
At a high level, Ghost, that's what the sector-by-sector picture looks like for now. And like I say, we probably still have another two thirds of the reporting to still go through. It is a very busy reporting season.
So, let's watch that very closely, because undoubtedly some of those stocks will then feature in Magic Markets Premium. I have no doubt we'll probably touch on that in this show as well over the coming weeks.
But yeah, it certainly lined up to be a very interesting last couple of weeks. Certainly, an interesting quarter as well. And if I were bearish (just in terms of where the market has gone), maybe a saving grace against that is that some of the earnings have actually come through and delivered on that.
So, the question mark is: can that momentum continue into a seventh consecutive quarter, or are we really just sailing quite close to the wind?
The Finance Ghost: Yeah, I just want to wait and see what happens with the oil price; the energy shock is really coming through the system now. Because a lot of the quarters that we've seen didn't have that in full flight. I think it's still coming.
And obviously in South Africa, where the earnings release cadence is a lot slower, then there’s a lot of the stuff we've seen now. People are still reporting February numbers. There are even still some December numbers occasionally coming through (although not really anymore, more February). That's before everything went wrong really.
So, it's now in this next cycle of earnings where I'm quite looking forward to seeing what actually happens.
For me, it remains a stock picking game, right? I just love picking the things that have been thrown out, to try and figure out what was oversold. I mean, that's the stuff you want to be buying, ultimately.
Mohammed Nalla: Maybe just to add to that point, Ghost, I think on this current set of earnings season in the US, you'll start to see some of that concern come through. Undoubtedly, it's going to feature on those earnings calls as well.
But I would say we need to see this quarter, as well as the next quarter, to really conceptualise how much of an impact that energy price is going to have.
Because generally (and now looking at it with a macro lens on), from an oil shock to it transitioning into headline inflation, you have a two-to-three-month lag. So, you actually see that headline inflation number tick up.
You've already seen some signs of that, but it’s very muted in South Africa. If this continues for longer, it impacts two things. It actually impacts a two-to-three-month lag, (in terms of when it features on the headline print) but the magnitude is what's going to change.
What also happens is that prices are sticky. So, it then comes through. They don't get adjusted downward. And very importantly, what a lot of people forget is that there are second round effects that then filter through to the rest of the economy that then gives you a much longer tail in terms of that inflationary, and then earnings impact as well.
And very quickly, just on a regional basis, Europe's already feeling that pressure very severely. They have a heightened sensitivity to energy price spikes. So, where I was previously bullish on Europe versus the US and other geographies, I'm now concerned about Europe because if this persists, the drag from inflation will hit Europe a lot harder.
So, I'm going to watch that. Obviously, we know the defence and industrial spend multipliers in Europe are slightly higher than the US. So, there’s lots of interplay there.
I think it's more than just this earnings season. I think you're going to have to watch this over the next two earnings seasons. And also see what ability companies have, in terms of either passing that on to consumers, or absorbing it into the margin; and quite frankly, in two months, whether the oil prices remain as high as they are right now.
The Finance Ghost: Yeah, Absolutely, Moe. I think we can call it there for this week. To our listeners, thanks for joining us in a holiday week. Hope you got something good out of it. You’ve got some charts to go and draw and go and check out some interesting names. Join us next week. Moe and I will be back to talk markets as usual.
Mohammed Nalla: Indeed. Let us know what you thought of the show.
Hit us up on social media. It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X. Or you can find us on LinkedIn. Pop us a note on there.
We hope you've enjoyed this. Until next week, same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
