Is Big Tech Falling Out of Favor & Looking at Next Year - 12/9/24

In this episode of Paramount Wealth Perspectives, host Chris Coyle and Chief Investment Officer Scott Tremlett dive into the latest developments shaping global markets. From Big Tech’s shifting dynamics and the S&P 500’s rising concentration to mixed economic signals and a highly anticipated Federal Reserve rate cut, this episode unpacks the key events driving market sentiment.

Scott shares insights on last week’s economic data, including strong payroll numbers, improving manufacturing activity, and concerns over weakening participation rates. They also discuss final third-quarter earnings trends, expectations for 2025, and whether market forecasts are overly optimistic.

Looking ahead, Chris and Scott highlight upcoming inflation reports, central bank rate decisions, and global developments in Europe, China, and India that could influence markets this week. Stay informed, stay ahead, and join us as we break down the numbers and trends shaping the financial landscape!

Transcript

Chris Coyle: 0:00

Intro song game on. Hello, everyone. Welcome to paramount wealth perspectives. Your go-to podcast for the latest updates on global markets and current economic events. This is your host, Chris Coyle. Each week we strive to bring you expert analysis on market trends, economic shifts. And key financial developments from around the world. Whether you're an investor business leader. Or simply curious about the global economy. Our podcast is here to keep you informed and ahead of the curve. Now let's dive into the markets and explore what shaping the world of finance today. Here with us today. We have Scott Tremlett chief investment officer and managing partner at paramount associates, wealth management. Scott. Looking back to last week. What are some major events you would like to highlight?

0:59

Thank you, Chris. Last week stocks were mixed. With the NASDAQ as the best performing index. Due to big tech leading the way. There has been a lot of recent chatter about the broadening of the market, but last week was a reversion back to the largest companies leading the way. The cap weighted S and P 500. Cap weighted means that the larger the company, the more accounts beat the equal weighted. Equal weighted means that every company has the same weight regardless of size. By over two and a quarter percent for the week. This was helped in part by Metta as the odds that Tik TOK is banned in the U S before may raised at 59%, according to poly market. Sorry, tick talkers. Back to the two and a quarter percent out-performance of the cap weighted index. This was the biggest outperformance of the cap way to index since July. Bank of America also noted last week that the concentration of the S and P 500. Continues to push higher. And now concentration sits well above the peak nineties tech bubble levels. UBS noted last week, they believe the market sentiment reflects cautious optimism. And not complete euphoria. Noting the big tech under-performance since July. However city group stated that future positioning is completely one-sided. And Goldman Sachs. Noted that us equities and total have seen the biggest inflows on a three-month basis since 2021. Wow. Scott. It's fascinating to see how much the market's concentration in big tech has surpassed. Even the nineties tech bubble levels. Do you think this reliance on a few dominant names poses a risk or is it just a sign of their growing influence? Chris. I personally, to me, the concentration in the big tech names is one of the biggest risks heading into 2025. I haven't been alone either. As it seems that the flows into us stocks is not going to these names. For the six week period ending December 4th, big tech had his largest six week outflow. Of nearly$1.5 billion. So that means that the big inflows I spoke of earlier are going to other market participants. Also earnings growth for these so-called magnificent seven stocks are expected to slow. Slow from 34% this year. To 18% next year. And if you take the video out of that calculation, That 18% earnings growth number drops to 3% expected for next year. Lastly big tech is expensive at 41 times price to earnings multiples. Above the 28 times for the entire market as of today. That is a huge shift. Scott seeing the largest outflows from big tech in weeks, wall valuations and slowing growth. Raise questions about their sustainability. Shifting gears. What happened with the federal reserve last week? Chris. We did hear some mixed signals from the fed last week, but before I get into that, I should set the stage on recent economic reports. We have seen. First we heard of some resilience on the consumer with positive spending commentary from visa and MasterCard. Along with some positive retailer earnings from Lulu lemon and Kroger. Furthermore, maybe the biggest economic highlight of the week came from the U S November payrolls. That came in well above forecasts. October jolts or job openings also came in above expectations. November ism manufacturing increase at its highest level since April. And it's best month over month improvement. Since August of 2023. I have to say, Scott, all of those reports sound very positive. Does that mean the fed is not going to cut rates next week? Good question, Chris. I have not yet given the full picture. I spoke of manufacturing, picking up. Yet the ism services number dropped significantly for the month of November. Dropping to the lowest level in three months. There was also some concern on the payroll report as the participation rate seems to be weakening. We saw the actual unemployment rate tick up. And the six month average payrolls trend fell to a cycle low. Along those lines. And from what I previously mentioned, Fed speak was mixed. Fed chair. Powell said that the economy is in notably good shape. And that the fed can be more cautious as it brings rates down to a neutral level. Although the fed governor Waller had previously stated that he is leaning towards a December rate. Cut. Now the odds of a 25 basis point cut next week. Are over 90%. From approximately 65%. The prior week. Thanks for that. Scott, it's interesting to see how mixed economic data and shifting fed rhetoric are shaping market expectations for a near certain rate. Cut next week. So what has happening in the world of earnings this week? We have a few names reporting this week risk, but earning season is pretty much all, but over. This week, we do have Oracle, Adobe Broadcom and Costco. Looks like the final third quarter earnings growth for the S and P 500 will come in at nearly 6%. Beating expectations. However, the trends are still below five-year and 10-year averages. Let me interject quickly here, Scott, and ask you a question. With earnings expectations, slowing and falling below the five and 10-year averages. What are your expectations for earnings next year? Another good question, Chris, I'm reading that median estimates for 2025 S and P 500 earnings are to come in net$275. For those who do not know how to interpret that number, what you do is multiply that number with the price to earnings ratio, to calculate the expected price of the index. As an example. Let's take the average price to earnings ratio of 28. A little less than where we are now. And multiply that with the$275 earnings number. And you get an S and P 500 over 7,500. And nearly a gain of 25% next year. Personally, I think that is a far cry. But it could be wrong. Most analysts are predicting. Markets will be from six and a half to 10% higher than where we are now. That would mean that either the price to earnings ratio would need to drop. Or that the earnings expectations themselves. Are just too high. Historically analysts overestimate the final earnings number by approximately 6.25%. Putting all of those numbers together. I find that the expectations for next year. Our little frothy. Personally. I see growth. Slowing growth, but growth. I would be happy with any number above 6% earnings growth for 2025. That's interesting to hear how you have pieced together, your own expectations, Scott. And I agree with you about the market expectations, being a bit frothy. Lastly, what reports are you most interested in this week? Chris this week, we have both consumer and producer inflation in the United States. The European central bank is expected to cut their rates by a quarter point this week. And Australia. Uh, Canada and Brazil. Also announced on rates. India reports, consumer inflation that is expected to have eased in November. China's top leaders begin in their annual closed door meeting on Wednesday. After they announced over the weekend sweeping policies to help bolster the property market. Well, we will certainly have to keep on the lookout for those reports and trends. And I'm sure we will have plenty to discuss next Monday. For now stay informed. Stay ahead. And join us next week for more key updates shaping the global economy. Thank you for tuning into paramount wealth perspectives. We hope you all have a fantastic week.