Beyond The Mag 7 – Positioning For Earnings Peaking and Yields Rising – Liz Ann Sonders

But I think the combination of the Nvidia's, the microns, the broadcoms of the world, they do continue to bring forth numbers that we're looking for, the CAPEXPEN numbers that we're looking for. It's hard to extrapolate that with an infinity sign. And at some point, there's going to be some sort of mess. And at some point, it becomes math where the base effects work to the disadvantage of the growth rate in earnings. I'm not sure we're at some imminent inflection point here. But I think we have to start thinking about the point at which growth starts to slow particularly earnings growth and how that feeds into the bigger picture backdrop. So caveat, I've known Kevin Worsh for 23 years. He has always been seen as on the more hawkish end of the spectrum. I don't worry about some give up of those inflation fighting credentials. My best guess is that they are going to pipe rates 25 basis points. Ultimately, I think what matters in terms of the equity market is the speed of any Fed moves. Are they going to take the escalator or are they going to take the elevator? Is historically has been a key determinant of how well the market does. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world giving you our listeners the edge. The Master Investor Podcast is sponsored by LSEG, interactive brokers, the World Gold Council, and BNY investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. My guest today is the chief investment strategist of Charles Schwab, Lizanne Sonders. Schwab is a firm with, wait for it, $13.4 trillion in client assets, making her the key source of investment advice to their 40 million customers. They are a delight. Lizanne is joining us for the second time on the podcast. And I am delighted to welcome her back, Lizanne. Great to see you. Thanks for joining us again. Oh, thanks so much for having me. I love our conversations, Wilfred. And sorry for the very generic background, but I'm in a hotel ballroom doing this. Well, like on the road. We appreciate your time, even more, given how clearly busy you must be. But it's great to see maybe a slightly bland background but the very green, positive top, your way. Yeah, might as well bring a little color in that way. Yeah, well, also our branding for the podcast is green as well on purpose, because we all want markets to go higher. So we all want markets to go in that direction. Sadly, though, if we're looking at the futures that we're calling this obviously Tuesday morning, your time, Eastern time, Tuesday afternoon, UK time, markets futures are down today. And I think the story we've got to start with if it's all right is what's causing that, which is the yield picture. And clearly been on the rise globally, it's not just a US phenomenon, but the moment we're looking at the US 10 year up to sort of 4.8%, the 30 year up to close to 5.3%. And I guess my first question on that, that they are big levels relative to anything in the last month or anything in the last decade, really, whichever time frame we look at it. Are you surprised that those levels highs of yields haven't actually hit stocks more so far? Well, no, I'm not terribly surprised. And if you just peel even one layer of the onion back, you do see that whether you go back to the late June recent low in yields or you just look at over the past month or so where the increase in concern about the Treasury Secretary Besson's plan to double the buybacks of the long end and what that says about confidence, really what we've done is continue a move toward normalization in yields, whether you track it against nominal GDP growth, whether you track it against the level of inflation, yields are not only just about where they should be, but arguably relative to nominal GDP growth, probably have more upside. You can look under the hood of the stock market and see the more interest sensitive segments like utilities, like real estate. Those sectors have had the worst performance over that two month period of time since we've seen the move up. So you do see an impact. It's just sub the index level. It's just been the latest reason why you've seen rotation. In this case, more recently into energy for obvious reasons, into financials. So it doesn't surprise me. And frankly, this normalization is not a bad thing. I think we're better off in a more normal yield environment relative to the financial repression that came in the aftermath of the pandemic and the aftermath of the global financial crisis when you had the 10 year bottom at half of 1%. I don't think anybody should be wishing to go back to that environment. I think it's the orderly component of it though that has kept the overall market from more volatility. I think if this were to become more disorderly or the speed of the move higher were to accelerate, then I think you probably see that filter into an equity market volatility to a more significant degree. - So what would qualify as disorderly if we're 4.8 on the 10 year? What level, how quickly would worry you? - Well, you know, level I think comes into play into the psychology and how investors react more so than some level that represents the turning point in terms of the economic impact. If 4.75 has been considered one of those initial psychological levels and to your point mentioning where things are this morning as we're recording this, we're there now at 4.80. I think probably the next somewhat obvious point from a round number perspective would be 5%. I think it would be speed of move and maybe a pick up in the volatility on the bond market side of things. So the move index, which is akin to the volatility index, the VIX on the equity side, the move index tracks on the fixed income side, on the treasury side. And that has been relatively calm. So I think it would be a combination of maybe reaching that 5% level with a pick up in volatility or moving very, very quickly from where we are now at 4.8 through 5%. So speed is a factor too that I think could filter into more equity market volatility. - And I'm interested though in the overall relationship then, because I would think certainly how I think about it and buying short term GILTS, UK government bonds can be attractive at certain levels. I would say if it's higher than inflation, it's a risk-free real return. Do you not think that the levels alter how most investors think about the risk reward of owning stocks or not? Do they not think is clearly using a sort of discounted cash flow to the risk-free rate like that? - What really matters to the equity market, aside from in the short term mentioning the speed of a move or the volatility associated with it, it's orderly not, I think what's maybe most important, and this is a more secular discussion as opposed to what's going to happen in the next month or week or in the lead into the September FOMC meeting, is the fact that we're now back in pretty deep negative correlation territory between bond yields and stock prices. And there's a variety of reasons for that, but let me put it in a really long-term context. So we had the great moderation era, which was the era that spanned from the late 1990s up until the 2022 inflation spike driven by the pandemic. And that great moderation era had a lot of facets to it. It was, there was sort of moderate inflation risk, very not much inflation volatility, generally a disinflationary backdrop with the exception of a spike in inflation in 2008, generally a benign interest rate environment where interest rates were generally trending lower. You had massive globalization that was part of the reason why we kept inflation relatively contained, China joining the WTO in 2001, and flooding the world with cheap and abundant access to goods and labor. And throughout that entire 20 plus year span with the exception of 2008, bond yields and stock prices were positively correlated. And that's because what bond yields were keying off of during that 20 plus year period of time was the growth side of the equation, wasn't so much the inflation side of the equation. So if you have yields going up because growth is improving without the attended concern about a risk of inflation, that's sort of undervana for the equity market and vice versa when yields were moving down. Well, go further back to the 30 plus year period from the mid to late 60s up until the late 1990s, it was the complete opposite. Almost the entirety of that 30 plus year period, bond yields and stock prices moved in the opposite direction because bond yields were keying off of the inflation side of the equation. There was much more inflation volatility, there was more economic volatility. You had shorter cycles, more frequent recessions. The growth phases were much stronger, but you had more frequent recessions. Now, of course, when bond yields and stock prices move in the opposite direction, and it means bond prices and stock prices were moving in the same direction. So that temperamental era, as we've been calling it, from the mid to late '60s to the late 1990s, it was a bit more difficult to get diversification through just a simple stock spawns mix. In the great moderation era, which gave rise to the simplicity of models like 6040 because you had that inverse price relationship. We're back now in an environment that I think looks more like that mid to late '60s to mid to late '90s. And that, I think, is what's most important for investors in terms of thinking, how do I navigate this? Not so much just how speedy the move is in the 10 years. There's some level that is a tipping point. It's that relationship between bond yields and stock prices and in turn bond prices and stock prices. The good news is, as we're in environment now, where we've seen continued democratization of access to other asset classes, non-correlated asset classes. So I think individual investors in particular are in a better position than they were back in that period of time for a lot of reasons, not just the correlation piece of it. So that, I think, is the bigger picture, most important issue that we're facing as we have already transitioned to what I think is in a very different era than the great moderation. That's really, really interesting. And I guess implicit in that for bonds to be able to do badly but stocks still do well is the expectation of higher and persistent inflation, which maybe will come to and what that should mean for your portfolio in a little bit. But just to dwell a little longer on recent events and the yield picture, I mean, what do you make of the best-ent intervention, the attempt to cap longer term yields? Is that something that is sort of understandable? If longer term yields are rising, then issue more at the short end while currently yields are a bit load? Is that a sort of normal course of action or is there a sort of different risk factor that's emerging of losing credibility that comes with those sorts of tampering in the market type place? You know, it's normal in the sense that they were already doing this, that's just announced a doubling of the buybacks of the long end. Now, the couple of problems. One, it's a bit at odds with Kevin Worsh's Fed, given that Kevin's desire is to shrink the balance sheet and/or let the long end do some of the Fed's job for it by tightening financial conditions. And then you've got treasury to some degree working at odds with that. So that's one issue. But I also think that probably the most important issue is that what treasury is trying to do here is they're focused on the symptom, not the cause, not the disease. The disease, in part, is physical prophecy and runaway deficits and runaway debt and investors now requiring a higher level of compensation to take the risk associated with financing that debt. You also have massive, massive issuance now relative to AI coming on the corporate bond side. So there's now kind of a shiny new object in the corporate bond market related to AI that may be pulling some investor's attention away from the traditional treasury market into the corporate bond market, particularly an investment grade, which is a little bit more of that apples to apples relative to treasuries versus say the junk bond market. So I think those are two of the forces at play and a concern that inflation is not a short-term problem that can just be tackled by the Fed. The Fed can only do so much, especially when an inflation problem is more of a supply side problem versus a demand side problem. The Fed has a better ability to kind of move the needle with monetary policy if it's a demand side problem. But this is certainly the energy side of things is a supply problem. It's not really a demand problem. Even the tariff impact on inflation, that's a bit of a supply problem. So I think there's an attempt again to tackle the symptom, but not really the disease. 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Does that not then somewhat create the environment that you just said we've moved out of, that the sort of actions that we saw, for example, in the reaction to COVID, even going back the reaction to the financial crisis, which is they're just trying to inflate the data away. - Right, well, they might be on the Treasury Department side but what comes along with that, is inflation that goes beyond the five-year span of it being above the Fed's target, then again, you're at that point where you're at odds with one another and it's just a question of what the tolerance is going to be on the part of the Fed, which of course spans well beyond wash. It's still amazing to me how often I get questions, whether it's tied to any sort of political influence, couldn't the administration just put pressure on wash to not raise rates, maybe not to lower rates, but not raise rates, but the C and FOMC is committee, it's not chair, and there have to be seven people that decide on moving the monetary policy level, whether it's a change in the Fed funds rate or balance sheet policy. And even though wash himself has been a little bit more quiet than past Fed heads, there's still a cacophony of speakers out there among the other governors and voting members. And I think this is going to be an interesting time between now and the September FOMC meeting. - I agree, I think it's going to be a fascinating time. And by the way, on the yield outlook, clearly it's not just the US in focus, everyone's kind of in similar positions. And just then, finally on your assessment of, I guess, the collective actions of Treasury in the Fed or albeit, I understand that the importance of the Fed between the two. I'd say the market over the last, you know, step back from it being best into wash specifically, but the market over the last five, 10 years has always felt comfort in the by the dip kind of tactic, because they think authorities as a whole will step in if problems really persist. Is that still your view overall, or do you think they're going to put inflation first and allow things to hurt in the short term if necessary? - So, caveat, I've known Kevin Warsh for 23 years. I'm not in touch with them on a day-to-day basis. We're not texting each other. He's not asking me what I think about what they should do from a monetary policy, but I've known him for a long time. And he has always been seen as on the more hawkish end of the spectrum. It was only when we were in the appointment process, the decision on the part of President Trump, of who he wanted to nominate for that position, the concerns, the whole sock puppet concerns that existed during the lead into the confirmation process. But I don't worry about some give up of those inflation-fighting credentials. I think he at least tried to make that really, really clear during the Jackson whole speech. Not only specifically saying 2% of silver to our target, we're not going to raise that. The core PCE is still the mandate. We're not going to change that. Inflation is too high. It's not coming down quickly enough, but also starting the speech with references to two different kinds of hikes. Now he was talking ostensibly about actual hikes, but there was more than a subliminal message in there. So I think, and there was a mention of the labor market side of the Fed's mandate, but I certainly get the impression that fighting this inflation boogie man that has not disappeared in the last five years, I think is going to take precedent over maybe what the Treasury Department is trying to do, which is more directly influenced by the goals of the administration. I mean, that's absolutely, as you say, it's going to create a fascinating couple of months as we lead up to the next meeting if we're going to see a hike and we'll see the political reaction to that. I guess part of the rotation we've seen, which we're going into in more detail in a bit, has been in reaction therefore to a steepening yield curve, is that overdone then? Do you think the yield curve won't keep steepening? - You know, the short answer and the honest answer is, I don't know. It's a question of, how active treasury decides to be, whether it's in line with what they've already announced or beyond that, and the upcoming data that we see. I think both labor market data and inflation data is important, but I think the burden of proof is more on the inflation side now. I think it would have to take probably something really, really significant in terms of weakness on the labor market side for the Fed to veer away from what I'm guessing is probably a biased toward hiking. That's what the market is priced in in September. So my best guess is that they are, they are going to pipe rates, 25 basis points. Ultimately, I think what matters in terms of the equity market beyond the long-term secular, great moderation exit to temperamental era entry is the speed of any Fed move. So if you look at one year subsequent performance of the equity market once the Fed starts a hiking cycle, the aggregate performance is about 4.5% positive performance for the equity market over the subsequent one year, which is sub your sort of average annual performance. But if you look at fast hiking cycles, that actually is where you get negative performance. So about negative 4% or so in the subsequent one year, you look at slow tightening cycles and the performance in that subsequent year is more than 10% positive. So are they going to take the escalator or are they going to take the elevator is historically has been a key determinant of how well the market does. - Hi guys, it's Will. I hope you're enjoying this episode. Just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do give us a five-star rating and leave us a comment. It really helps other people find the podcast too. Now, back to the episode. - That's very interesting. And I guess the other key factor which can solve all problems is the pace of economic growth. What do you think the market is pricing in at the moment and where do you stand as to whether the US is likely to be to a disappoint? - So, you don't tend to see published forward estimates for nominal growth. But I think you probably need nominal growth to be pretty high, you know, mid to high single digits, to be supportive of the sort of overall economic backdrop, the relationship between bond yields and stock prices and the idea that you can sort of grow your way out of the problem. I mean, that really is mathematically the solution to this problem, this problem of runaway deficits and high rate of debt growth is have economic growth be higher than the rate of inflation and higher than the rate of debt growth. So if you've got economic growth moving fast at a faster rate than debt growth, then you mathematically start chipping away at the problem. We're not there. That's ideally the goal is to get to that level of nominal growth that we can start to grow our way out of this problem. The problem is if inflation keeps creeping higher, then you've got real growth that is subpar. So I think, you know, mid to high single digit nominal growth with profit margins being maintained or, you know, at least stable, not declining. Earnings growth, I think, is set to ease from just the blistering pace that we saw in second quarter. Again, at some point it becomes math where the base effects work to the disadvantage of the growth rate in earnings. I'm not sure we're at some imminent inflection point here, but I think we have to start thinking about the point at which growth starts to slow, particularly earnings growth and how that feeds into the bigger picture backdrop and whether that's sufficient to help bring down inflation. So that's a you less constructive on the outlook for the overall market than you have been in the last couple of years? - Not necessarily, I think the market environment is going to persist as one defined by pretty rapid fire rotations. I've been saying that rotation is the new momentum trade. And I think it's a function of the unique economic cycle we've been in since COVID where we have these rolling expansions and rolling recessions at the sectoral level. And this time I'm talking about economic sectors where you don't have this big aggregate expansion or big aggregate contraction, which often comes in a more linear cycle where you have a recession, you come out of a recession, you have that recovery phase, then you have the expansion phase, then things start to slow, the Fed has to step in, tighten policy, worst case scenario, you get some sort of financial system problem, massive constraints in terms of credit access, that brings on a recession and then you start the cycle all over again. This has been an entirely different cycle because of the pandemic and its aftermath. You had a boom in manufacturing in the good side of the economy when we were in the early period of the pandemic because services were completely shut down. So when we had the stimulus, it had to be funneled into the good side of the economy because there was no access to services. That gave rise to the inflation problem with which we're still dealing. But ultimately when the economy started to open back up, vaccines were created, you had pent down demand on the good side, you had pent up demand on the services side, manufacturing went into a recession, but services, which is a larger share of the economy, its strength was more than an offset. So we just sort of overall rode through it. I think that's the environment we stay in. And that in turn helps to explain the rotations we're seeing in the market. And I think that sort of rolling nature to the economy, rotational nature to the market. I think my base case is that that persists for some time, barring some black swan kind of event or real problem within the financial system, a major credit crunch. That's not a near-term base case, but that some sort of credit crunch or a black swan event or something that becomes really disorderly in the treasury market, where it becomes unanchored from what either the Fed and/or the treasury could do to try to contain that. And I guess the other factor will be if the bigger market caps stocks of the ones people are rotating out of it, it might still have a net effects to the downside. On which note, let's just touch on some of those mega-cap tech names. And as much as you rightly point out, already have the base effects can make it harder to keep growing fast. We just had Nvidia late last week with their numbers. I mean, they do keep delivering in a quite remarkable way. They do. And clearly, that's a bell weather for the whole AI movement and spell the different way. The weather forecast is pretty good per Nvidia. You've got Broadcom coming up tomorrow as we're taping this less of a bell weather than Nvidia. But I think the combination of the Nvidia's, the microns, the Broadcom's of the world, they do continue to bring forth numbers that we're looking for, the CAPEXPEN numbers that we're looking for. And at some point, there's going to be some sort of miss. And I think what's interesting these days in this environment of just unbelievably strong earnings growth is number one, when do we actually hit the inflection point? Because I'm fond of saying in half for my 40 years doing this, better or worse, often matters more than good or bad. We can talk about whether it's the MAG-7 or the neural 9 or the tech sector or the communication services sector or a combination or some AI basket. It lots of ways to slice and dice it. You could say, OK, that the growth rate was 60% and it's dropping to 30% but, man, 30% is still phenomenal. But often it's the inflection point, it's the rate of change, it's the direction of travel that can have an impact. And to some degree, we are seeing some impact already come into the mix. I think the early poster child of this many weeks ago now was when Samsung reported. They reported better numbers than the consensus, the cell side consensus estimate both on top line growth and bottom line growth, but they arguably undershot the buy side sort of whisper number or expectation. They fell in between those two. And it caused a rout in the stock because of how big a weight, both Samsung and SK Heinex are in the Cosby, the Korean stock market, that had a draw down to the tune of about 40%. We've since seen a recovery there. But that's what I think probably the next step will be. And I'm not suggesting it comes as soon as third quarter reporting sees them. But the next step would be dislocations that you start to see that are a little bit more at the individual stock level. And you start to see more dispersion. We're already seeing that in a group like the Mag 7. Right now, and I added micron and broadcon, I've been calling a slightly expanded group, the neural nine, I post about it on my X feed every day. And that again, it concludes micron and broadcon plus all seven of the max seven. And from a contribution to S&P returns standpoint, not just simple price performance, but contribution to returns, which is price performance multiplied by cap size equals your contribution. You know, you range from micron, which is the third best contributor to overall S&P returns this year. I'm not sure what one and two are, but it's not any of the neural nine. But you've got then Tesla, which is the 503rd ranked contributor S&P returns this year. So almost the best to the worst in an array of nine stocks. So some of that dispersion we're already seeing. And that's why this desire to invest in all things and AI has expanded well beyond that core aggregate group like the max seven. And it's part of the reason why you're seeing the Russell 2000 has doubled the performance of the S&P year to date. And actually is outperforming the S&P in the past two years. It's not just a 2026 phenomenon. So I think we're already seeing more dispersion even though the interest is still in the AI story. There's a lot of money now looking for different shiny new objects. - It's such an important point. And an episode we did in July, Jim Mellon was talking about a similar point, which is actually max seven share price performance might underwhelmy when you pause and look at it year to date relative to the headline numbers. They still, I guess, or the neural nine, I like that still contribute such a huge amount to the overall earnings though. And I guess if that does roll over, as you said, no signs of it yet from Nvidia, but it can't go on forever, the base effects will take effect at some point. Does that not spook the broader market at some point? - Probably does, yes. So let me put some numbers on that. If you look at expectations for calendar year 2026, so second half is still not in the bookshed. So we're talking about existing numbers that have come in for the first two quarters and then consensus estimates for the second two quarters. And you look at the growth rate for the overall S&P earnings calendar year 26 relative to calendar year 25. Nvidia, just that company alone is 18%. That expected earnings growth. You add micron, which is another 14%. That gets you to 32%. So you're talking about one third of all S&P expected earnings growth in 2026 is a function of two companies. If you go out to the top 10, in terms of top 10 earnings growth rate companies, and that brings in Chevron and Exxon, as I think number nine and 10 on that list, they represent two thirds of S&P earnings growth. So yeah, you have some sort of high profile myths, not just what that does in terms of the psychology of the market, but mathematically, you would see a ratcheting down of estimates. Now, there's another somewhat positive side of this. And that is that the big surge in earnings and in turn forward expectations that occurred throughout second quarter reporting season, 10 out of the 11 sectors have seen an improving earnings profile. So at least we have some momentum in areas other than just to tech AI, AI adjacent space. It's just not media enough when you do the math for a cap weighted index. So we have less of a concentration problem in terms of the stature of these companies as it relates to concentration from a market cap perspective. We still very much have a concentration problem on the earnings growth side of things. - This podcast is sponsored by Interactive Brokers. Building wealth starts with the right broker. An interactive broker helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com/masterinvestor. This episode is sponsored by the World Gold Council, the global experts on gold. They champion gold as a trusted strategic asset provided market leading research to help investors understand gold's role and modernize how gold is owned, traded, and used developing industry standards and market infrastructure. Learn more at goldhub.com. - So before we get to the breakdown, the rotation we're seeing in sector picks, where are we now on the headline valuation for the index? - Well, the good news is is that the denominator and the PE equation has been rising to at a faster pace than the numerator and the PE equation. So we've seen the forward PE and there's gonna be a variety of sources for a forward PE depending on whether the denominator is fax at based earnings information or LSEG, IBES based information. So there's not some clean, this is the number. It really depends on what the plug is for the denominator. But based on the data that we look at, you were at about a 22 multiple earlier in the year and you're at about a 19 multiple right now. That's not that's not so bad. Now, rising inflation or inflation that is not coming down, maybe that's a better way to state it, all LSEG will suggest you probably don't have a lot of upside from a multiple perspective. But it's not a bad backdrop. I probably should have applied a caveat though right in the beginning. I look at every variety of valuation metric, forward PE, trailing PE, shillers adjusted, cyclically adjusted PE, Tobins Q and the Fed model and equity risk premiums and the Buffett model and rule of 20, et cetera, et cetera. Valuation is interesting to look at, but it only has relevance to what the market's going to do if you're talking about, say, a subsequent 10 year forward look. There is zero correlation between, let's use forward PE because that's what we're talking about, forward PE and subsequent one year performance in the S&P 500. It basically rounds to no correlation. If you do a scatter gram version of it, the dots are all over the map. There have been plenty times where the market is cheap and the market continues to do really poorly. There are playing times where the market's expensive, market continues to do well, gets more expensive, continues to do well. So we can talk about valuation. It's part of the toolbox of what a strategy looks at, but I would never sort of adjust a market view solely because of where valuation is because valuation is really an indicator of sentiment. More so than some timing tool. Well, there's no good timing tool, but valuation is definitely not one of them. - No, and I remember when you joined us last time, you were talking about how sentiment is perhaps focused on too often as well by investors as well, trying to gauge short term decision making. Maybe we'll come to that a moment, but let's talk about the rotation. I mean, you've already alluded to across a number of answers, but there has been a big rotation during the course of calendar year 2026 already that perhaps is not talked about as much as it should be. - So, well, by far the best performing sector this year is the energy sector. People are generally not that aware of it because it's such a small representation in the S&P 500. So it's stellar performance doesn't prevent the S&P at times from from shopping around because it only represents about three and a half percent of the index, but that double the performance of the tech sector. And then you have the lager. It's particularly more recently, as I mentioned, which are those more interest sensitive segments like utilities, like real estate, very widespread. And the other thing to understand about this environment, when people talk to me about how the market just seems to be whistling past all of these geopolitical and macro concerns with very little, if any, downside. But what happens via rotation is you see it more at the individual stock level. So here, again, are some numbers. So S&P, at the index level, didn't even hit 10% correction territory this year. It's maximum drawdown in that post-oran war period of time was 9% in change. So just shy of 10%. But the average member, if you look at all, it's actually 504 members because two companies have two shares of two classes of service, of shares. If you go at each individual stock in the S&P 500, look at their individual maximum drawdowns and then take an average of those, that average member maximum drawdown for the S&P is negative 25%. If you do that for the next one, NASDAQ at the index level, the NASDAQ did have a correction. Its maximum drawdown at the index level was 13% over that same post-oran war, start initiation of the RAN war period. But the average member within the NASDAQ has had a 45% drawdown on a year-to-date basis. It's just happened via process of rotation. So you actually can see a process where you ease excesses, whether it's valuation excess or concerns thereof, whether it's sentiment excess, whether it's. You know, the earnings expectations bar having gotten set too high, whether it's a narrative change in terms of macro drivers, whether it's a function of monetary policy and interest rates going up and maybe we want to move away from the interest sensitive areas and go into a sector like financials that as long as the yield curve is steep, they're beneficiaries. So that's not a bad way to sort of ease some of these excesses through a process of rotation. I think we would all choose to have this experience versus the S&P and the aggregate dropping by 25% all at once. So it's not a bad way to go through via rotation. And that's my base case, that's the environment we stay in, save for something that is a bit more exogenous and a bit more extreme than what we've seen so far. And obviously the rotation, as your alluded to, has already started and certainly taken place as some extent, which are the sectors where you think there is much further to go, that there's more rotation to come out of and into. So I think we're going to still see bouts where there's sort of exit from the mega-cap tech names, but there's still a buy the dip mentality. So for as many times as we've seen this year where there's sort of a move out, there's that money again looking for the shiny new object. I still think that we're going to have times where we move back in, especially when you get into earning season and you get the enthusiasm associated with the eye popping numbers that you see. We do have sort of favorable to unfavorable scale for sectors. We don't sort of have that maybe traditional overweight underweight labeling because we think you want to be more subtle and we also believe that factor-based investing, maybe not instead of sector-based investing, but as an overlay to sector-based investing. And factor-based investing is just, you know, factor is another word for characteristics. So factors like, you know, there's growth factors like forward earnings estimates being positive, stability or strength in profit margins, positive earning surprises. You have more value oriented factors, everything from traditional PE ratio to price to book, price to sales. You've got balance sheet oriented factors, strong free cash flow, high interest coverage. And there's been more consistency in outperformance and underperformance when you look at the factor level than there has been at the sector level, which is much more monolithic. So we do have a bit of a cyclical bias in terms of the sectors that we have more favorable ratings on, industrials, materials, financials. We also, a little bit more from the valuation perspective, are on the more favorable end of the spectrum on healthcare and then on the less favorable end of the spectrum would be areas like I already mentioned, you know, utilities and real estate. So, but we think applying that factor overlay, because even within sectors, you're seeing much more dispersion. And the key to figuring out, you know, what's going to be on the better end of that dispersion of performance, what's going to be on the worse end, I think that's where that factor screening or analysis comes into play. A few other sort of different factors I wanted to touch on, Lizanne. The first is the midterms, is that something that the market actually doesn't care about or historically, is there a reaction leading in and afterwards depending on the result? You know, the market often does care about the midterms. You know, it's the worst year overall on average for the four year election cycle. And the volatility tends to pick up at around this point in time, sort of the summer and the lead in and then you sort of tend to see a rally and I do air quotes around tend because there are exceptions, there's exceptions to every average around the election cycle. You know, I would, if you could gauge what the market is pricing in or probably should be pricing in, is pretty high likelihood of the house changing hands. Maybe not quite 50, 50 or more in favor of the Senate changing hands. So that seems to be the consensus and our team in Washington led by my fabulous colleague, Mike Townsend, he puts it, I think his odds are 75% that the house turns, I think it's 40 or 45% that the Senate turns. See then it's a question, you know, there's very little likelihood that the, that the, we go back to sort of pre one big beautiful bill, which would in turn be pre say that 2017 tax cuts. So don't worry about some sort of imminent change to tax policy. But investigations would undoubtedly pick up. There would be fewer executive orders or fewer decisions that are made that arguably do require Congress. So I think it could bring some volatility into the mix. But it's, if say the house does turn and the Senate doesn't and people are shocked by that and there's a big market reaction, I would say what rock of you've been living under for the last year, that is, that is, that's would not be a terribly surprising outcome. The other kind of longer term fact that I'm interested in your take on and Charles Schwab, you guys have great insight into this, but is the wealth effect and how much this very long rising period of rising equities has had on the US economy as a whole and in that terms of virtuous cycle then on the stock market too, and whether that alters the potential risk reward from here that if that gets derailed. And I guess on that question, we're asking not not so much about just the size of a market pullback, but the persistence of one and how long it lasts is the downside more pronounced if that probability arises than over most of this sort of century. Probably yes, and I, we've never seen a higher share of household assets invested in the equity market. You can look at Fed data related to that. You can look at data around different percentages of that exposure to equities and look out subsequent 10 years and the outlook from an equity return standpoint is on the lower end of the spectrum given that we're at all time highs in terms of exposure. I do think there is the carry into economic performance that is probably even greater than what existed in the late 1990s into the internet bubble bursting in early 2000. So to go back to that period of time to illustrate this, we had the bursting in the internet bubble that started in early 2000. You saw them, the equity market peak in March of 2000, ultimately didn't bottom until October of 2022. We had an economic recession in 2001. It was not a terribly severe one in terms of the contraction in GDP, and I think it only lasted nine or 10 months. My view is we would not have had a recession at all if it weren't for the problems in the equity market because it wasn't a story of major tightening in financial conditions or monetary policy. It was not a major credit crunch. It wasn't some sort of plumbing system problem within the financial system. It was a bursting of an equity bubble and the wealth effect filtered its way into the economy. I think you have to think in those terms this time too, but there's also some circular logic that needs to come into it and maybe an unassurable as of yet question is sort of chicken and egg. So I think it's easy to connect the dots if we were to see something more significant occur in the equity market, something more severe than the kind of many corrective phases we've had in the past year or two, something a little bit more lasting than say what happened during the COVID related fair market. It's hard not to think that that filters into the equity market side of things. And in turn, if we were to see more weakness in the economy develop than what is built into expectations, if you're really were at risk of an aggregate, you know, actual recession, how much does that feed into the equity market beyond what it might have in the past where you can sometimes point to periods where you disconnect the economy in the market. So yeah, I think that that is something that we all should worry about without having any real sense of when And if that tip-and-point might occur, at least in the near term. And I totally get what you said throughout this conversation about timing the markets. It's a fool's errand. It's impossible to do. And I totally get what your CEO said to us when he joined us, Rick Worcester, about it's about time in the markets, not timing the markets. That said, there's been quite a lot of negative factors we've discussed over the last 45 minutes. So I just wanted to go back to a question I said earlier, which is not in changing that fundamental piece of advice, which is time in the markets is worthwhile. I mean, that's what this podcast is all about. But compared to the last three or four years when we've chatted a lot, either on this podcast or before on CNBC, are you less constructive than you were in moments during those last three, four, five years? No, I think we'd have to be maybe a bit more mindful of the risks right now. But I think there are traditional disciplines that I think can help investors continue to participate in what has been a pretty healthy market backdrop without adding undue risk and portfolio. They'd be mindful of concentration. It's boring to talk about on this or on CNBC. But diversification across and within asset classes matter so much in this environment. Be mindful of concentration. Take advantage of rebalancing. And for a lot of investors, we've been saying a lot of the rebalancing programs, certainly on the institutional side, you know, traditional mutual funds do their rebalancing, typically the last week of each calendar quarter. A lot of other programmatic structures that have automatic rebalancing, they'll do it based on the calendar. It might be semi annual. It might be at the end of the year. One of the things we've been saying to investors is consider portfolio based rebalancing, where your actual portfolio tells you when it's time to trim back an asset class or even a stock or a group of stocks that have had outsized performance on the upside. And in turn, let your portfolio tell you when maybe you want to add to underperforming areas. So assuming you have some sort of strategic asset allocation that makes sense for you as an investor, your time horizon, your risk tolerance, your need for income, past experiences, whether your financial risk tolerance and your emotional risk tolerance are two entirely different things, which often happens and sometimes we learn that the hard way that those are the disciplines that matter. And what I fear maybe is that there is a bit more of a gambling mentality, certainly for younger investors. We have been a big voice on this. I wrote a piece back in April with my colleague, Kevin Gordon, titled Gambler's Blues, but still on the website, Schwab made it into a commercial, because it's such an important message about the blurring of the lines between investing and gambling. And we're seeing that, we're seeing it in all the surveys done of the younger generations and they view gambling, whether it's sports betting or in the prediction markets, or a really short term get in, get out a gamble on the stock market, you're seeing it in terms of options activity, to me, that has the potential to be a crisis at some point, almost a sort of a financial literacy crisis in the making. And our message around that has been investing is about owning. You are a participant, you are a participant in wealth creation, you are owning a stake say in a company and its future cash flows, and you're a participant in that, you know, your approach to investing is about gambling, you're not a participant, you're a spectator, and gambling is about hoping, not about owning. You place a bet, you step back as a spectator, you hope it's a windfall, more likely than not, you lose the entire investment. And we also know that over any reasonably long time period, the odds are in your favor as an investor. Anyone that's ever gambled, anyone that's ever stepped foot in Las Vegas knows the odds are against you. And that to me is the thing that has changed, and I worry most about. And you see it in day-to-day action in the market and single stock ETFs and all the leveraged inverse, and it does bring back shades of 2021 when it was the meme stock craze and it was the SPAC craze, and we're seeing a bit of that again. So I find that there are pockets of sentiment froth and a mentality of get in, get out, which neither of those are an investing strategy. That's again, that's just gambling on two moments in time. So that specifically is something I worry more about than some, you know, 08 crisis ahead of us and a deep, long-lasting bear market. Well, listen, I totally, totally agree with that. There's a very much against gambling versus in favor of long-term investment at the house and the maths are against you and one and the behind you and the other, which is something wrong with, you know, placing a sports bet or going to Vegas. I mean, but we shouldn't, we shouldn't blur the lines. I was just talking with my wife that we need, we need to get back to Vegas. It's been too long. But as you say, once every few years only, and there's a, it's been a pleasure. Thank you so much for joining us again. Thank you. On the maths investor podcast and hopefully we'll do this again in person at some point next time you're in London. I hope so too. Thanks. Well, bye. I love our conversations and really appreciate you having me again. Lizanne Saunders from Charles Schwab, they're great to have her back on the podcast. Next week on the maths investor podcast, we'll be joined by Jeff Curry of real macro, a company he's founded on his own since leaving Goldman Sachs after 30 years where he was head of commodities, lots to discuss with Jeff that's coming up next week. So please do hit follow or subscribe if you haven't done so already. The master investor podcast is sponsored by LSEG, interactive brokers, the World Gold Council and BNY investments. Please do remember the views expressed in this podcast are for general information purposes only nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation more on that in the show notes. This podcast is produced by paradigm productions and master investor limited in association with bird line media. If you've enjoyed the show, please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops.