Big Tech, Small Cap Stocks, And The Upcoming Election On Markets
Jeremy Schwartz, CIO of WisdomTree joined Benzinga's Premarket Prep team this morning to discuss what he sees going on in the market.
Benzinga's PreMarket Prep is the #1 go-to source for everything you need to know before the market opens! Join our expert hosts as they break down the latest market trends, analyze key indicators, and provide actionable insights to help you navigate the trading day ahead.
Benzinga's PreMarket Prep is the #1 go-to source for everything you need to know before the market opens! Join our expert hosts as they break down the latest market trends, analyze key indicators, and provide actionable insights to help you navigate the trading day ahead.
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NewsTranscript
00:00All right, wrong button there, AB, but we have Jeremy Schwartz on CIO at Wisdom Tree
00:07joining us on an interesting Monday here.
00:11So let's just, you know, we tried to dance around the political issue.
00:15You have a lot of different factors.
00:18I know you're very, very diligent about the markets and your indicators and everything.
00:23And you had this kind of political news come out over the weekend, whether anticipated
00:28or not.
00:29Do you just like draw that stuff out the window or do you say, okay, I'm sticking to my models.
00:36This is my bait.
00:37This is my scenario.
00:39How do you do it?
00:40How do you approach such a big political upheaval in the markets?
00:44Well, there's how we manage our funds.
00:47You know, most of our ETFs are very rules based and disciplined and they have a regular
00:52rebalancing program.
00:54And so, you know, when we rebalance back to dividends or earnings, as we do with across
00:58many of our indexes, those follow a particular schedule, you know, and those are not going
01:03to take into fact politics, but when we're talking about market sentiment and what's
01:06shifting and where to focus on in the market, you do have to factor in a lot of this stuff.
01:11I think we could talk a little bit about the China that you guys were just talking about.
01:15I think that's one of the big topics we think about in terms of the international markets.
01:19I've been on that discussion with you guys in the past saying, hey, I tend to prefer
01:25ex-China.
01:27I like Japan.
01:28I like India.
01:29I think they're at the center point of the rotation away from China.
01:33I think one of the big topics will be, you know, will the policies, if Trump is the president,
01:46there's some interesting discussion about from his recent speech.
01:49My friend Marco Papich, who's now at BCA Research, who was at Clocktower Group before, he wrote
01:55a very interesting thread saying people are not sort of focusing on some of the Trump's
02:00speech on China, that, hey, the narrative is that he's going to be very, very tough
02:05on China and, you know, that he will be, you know, now some of the politics, he started
02:10the tariffs and then Biden continued a lot of the tariffs, you know, but Marco pointed
02:16out that Trump's sort of a mercantilist in that he's a very business oriented deal type
02:22of guy.
02:23And it's possible that actually you come to deals, that they offer him a deal and they
02:28start building EV factories in Ohio and he accepts that deal.
02:32And so that would be kind of very interesting because I've been negative on China thinking
02:36that the geopolitical tensions are here, they're going to stay with us for some time.
02:41And if that tone shifts, that you actually do come to some deals, that could be one of
02:46those positive surprises that you need to see to get China actually back in focus.
02:50Yeah, because you don't think, I'm agreeing with you here, Jeremy, you don't naturally
02:53think of Trump, you know, as going to help the Chinese situation, but the deal perspective,
02:58and you know, he does, he's willing to do deals.
03:00So it's a great point.
03:02I mean, so it's not just a slam dunk that China's going to get hammered if Trump gets
03:06in.
03:07Right.
03:08So I'm going to be following that story as probably one of my biggest geopolitical stories
03:12of, you know, we've been benefiting in Japan, I think, you know, Japan, our Japan funds
03:18are top performing fund up 30% this year after huge moves last year, India's benefiting in
03:24the rotation away from China.
03:27I think India's got some great secular forces behind it, demographics, and a very pro-business
03:33government that has put in a lot of places I think makes India really one of the best
03:36place for the next few decades beyond for the geopolitics.
03:39But you know, China has been out of favor, and you need something to change to really
03:45get the sentiment to shift.
03:47And if there could there be a positive surprise on deal making that that that's gonna be one
03:52of the key key things I'm watching.
03:55All right, let's go to the great rotation here.
04:00It got started, it got started in a big way.
04:03This week, we've had a lot of false starts in this rotation.
04:08This IWM move finally clearing that 210 area got a little bit overdone over 225.
04:16Kind of pulling back in here is just just one of like, like, you know, you see the false
04:22starts and then it just kind of comes back down again.
04:25Or do you think that the hopes of the 95% chance of interest rate cut in September here?
04:32This is it, folks.
04:34This is the turn.
04:35This is the time to pile in the small caps.
04:37I mean, it's been a decade long move, multiple decade long move of large caps being small
04:42caps.
04:43Now you say like, what's causing it?
04:44We've been trying to look under the hood, in terms of the factors that have driven large
04:49caps.
04:50And certainly, you know, the narrative is all the mag seven is driving for sure, like
04:54the tech companies are leading and, and you say, well, why are they outperforming?
04:58You know, interestingly, the sales growth of the last decade for small caps have been
05:01on par with large caps, but you're definitely seeing multiples rise a lot more for large
05:07caps over small caps.
05:08So small caps have faced a lot of multiple compression, whereas large caps have been
05:12growing 4% a year, let's say for the last decade on multiples.
05:15Now what, you know, the, the narrative also has been small caps are the ones paying the
05:21higher rates from the Fed.
05:23They've got half their torsion socks out with a note this morning saying half of their debt
05:27is floating rate.
05:28So you have seen in our work, seeing their borrowing costs go up a lot more.
05:33And so they really do need the Fed to pivot and to start seeing those rates come down.
05:36Now, the earnings environment has been terrible for small caps.
05:40If you look at what we, when we have an earnings monitor for small caps, they're declining
05:45year over year, double digit numbers, a lot of the small cap indexes.
05:49So, you know, no, they're starting to report more, the large head was reported, but you
05:54know, they're surprising a little bit higher, but you really need to see them starting to
05:59grow.
06:00Now, as you get into next year the mag seven starts slowing down and some of these other
06:03X mag seven or the, or the other small cap index start to see their better earnings growth
06:09for it to be lasting.
06:10You really do need to see the earnings start to reform better, but right now trading on
06:14the Fed and the pivot, and we do think the Fed is pivoting now, maybe they don't cut
06:20as much as people actually think, and that'll be one of the things, you know, you're watching
06:24into next year, but the earnings have not been there.
06:27And we do see that shape up more for it to, for that rally to be lasting.
06:32So in terms of earnings, you know, it is, you know, we're getting back into the swing
06:35of things of earning season, something big companies set to report this week with the
06:40kind of like, you know, higher valuations that the big tech mag sevens are trading at.
06:45How important are these earning reports going to be, you know, this quarter and maybe the
06:50next one as well?
06:52Well, I, I've been saying that tech is not in a bubble that, you know, a lot of people
06:55say, well, they're, they're dramatically more expensive than everything else.
06:59And it's definitely true, you know, 10 to 13 PE points higher than the X mag seven,
07:04but their earnings growth are expected to be double if, if, you know, around double
07:07the non mag seven over the next few years.
07:10So it's, it's supported by faster earnings growth.
07:14Now, if they start to disappoint, that's when you can have a bigger correction.
07:19And so I, I, I, you know, it'll be important that they keep delivering, they're expected
07:25to slow from some of their past growth rates.
07:28But if there's any real cracks, that's when you start to see a slowdown.
07:31But you know, we, I think they're, they're higher multiples are justified by actually
07:35delivering the much better news growth than the rest of the market.
07:39Before you change, I just want to take it back to the political situation here too.
07:44I mean, what we saw, you know, we saw a big Trump pop, then we saw a Trump dump because
07:50he said they weren't going to, you know, because he said he was lukewarm to basically protecting
07:54Taiwan.
07:55Are we back in this situation where tech stocks all of a sudden are Harris stocks and maybe
08:02not Trump stocks?
08:03It's a political situation or can we, can we not reach there yet?
08:07Well, and I think some of the rotation will come on tax rates too.
08:12You know, I think the, you say, well, what, why is the market going up today on this,
08:17this new, this new news?
08:18And you say, well, in some ways, you know, Trump's still the, the predicted market still
08:24say Trump is going to win, but maybe the, the, the house odds are actually going a little
08:29bit more, the odds of a divided, not having a sort of Republican sweep.
08:36Those odds have actually gone down.
08:38Now, the question is tax rates.
08:39You need, you could think you need the Republicans have all three, the Senate and the house,
08:45the presidency to get the corporate tax rates extended and, and small caps, I think need
08:52the tax rates more even than the large caps.
08:54You know, Apple has Apple Ireland where they get lower tax rates by keeping a lot of earnings
08:58abroad.
09:00The small caps are much more, they don't have all those gains of playing the international
09:05markets.
09:06So on a relative basis, I do think the rotation is more important for ex tech than tech on
09:11taxes.
09:12And so that'll be one of the key stories to watch is what do you think is the Trump corporate
09:15tax cuts expire at the end of next year.
09:18And so that's what we have to be thinking about for some of those rotations.
09:21Just because I'm seeing such a tech rally here today.
09:24And I kind of think, well, by Biden dropping out is not the best news for Trump in the
09:30world, because I think the markets were pretty much saying Trump was going to beat Biden.
09:34Now you bring Harris in, and obviously, you know, maybe it's not as easy of a path.
09:40I think Trump is still obviously leading in the polls, nothing has changed too much.
09:44But it's not like he's going against somebody who's having trouble putting words together.
09:48I mean, Harris, ex attorney here, like even to a debate, like I like people are saying,
09:54you know, well, you know, Harris going to win a debate, and I was like, maybe the case,
09:58but I just see such a rally here in tech this morning of this, it makes me start to think
10:02that are we starting to get back, you know, linking, you know, that, you know, and we
10:06sold off, obviously, last week with the Trump dump when he said they were lukewarm to protecting
10:10Taiwan.
10:11But maybe, you know, that was just Trump just shooting off his mouth.
10:13And, you know, obviously, maybe wasn't, you know, thinking about that before he said it
10:17when I made the whole market dump.
10:18So that's just why I'm looking here and trying to figure out relationship wise, you know,
10:22what's Trump stocks, we were doing this earlier to Jeremy before he came on the show, which
10:26stocks are Trump stocks, which stocks are Harris stocks, and maybe that's where my next
10:29question is, can we start like figuring this out here?
10:33Or is it too early to start figuring out which stocks are Trump stocks, and which stocks
10:37are Harris stocks?
10:39Well, there's going to always be these these micro level stories,
10:45and I'll, you know, we'll do our work to try to figure out which are the sectors to with
10:49you over time. I mean, I do think the I tend to focus more on the macro than the micro
10:54of the individual stocks.
10:55And, you know, so I do think the small caps are part of it.
10:58That's tied to the Fed, tied to the tax rates.
11:01This the international markets, the China story is like that is going to be a big story
11:06that we're watching as we talked about.
11:09And as the policies become clearer, you know, we'll find some more more angles.
11:15But I don't have I don't have another good example for you at the moment.
11:19Is it time to start? You mentioned it at the top of the show, you know, international,
11:23you know, I mean, you've been you've been pounding the table on Japan here for quite
11:27some time with all the uncertainty that we have over here.
11:31I mean, you know, the catch up trade.
11:34I mean, we did talk about China, but Japan here, a little bit of a pullback
11:39last week. Also, you mentioned India, right?
11:44INDE. I mean, it's just, you know, is it just a time for that?
11:49You know, just maybe just to take the foot off the throttle here and really focus abroad
11:54more for, you know, until things are a little bit clearer here, maybe after the election
11:59or maybe early in the next year.
12:02Well, I do still like the sort of broader participation story in the US.
12:07I like the you know, that everybody's focused on AI and I do think AI is a real
12:11technology. So I do think over time, more people figure out how to benefit from
12:17it's not just going to be NVIDIA all the time.
12:18And so I do think you could stay in the US and get 13 times earnings.
12:22You don't have to go abroad to get some of those cheaper markets.
12:25You know, the US small caps at 13 times for many of our baskets focus on
12:31dividends. Quality dividends are an interesting place to look.
12:35But if you do go overseas, I don't think it's everything.
12:37I mean, I do think Japan and India stand out as our two favorite countries.
12:42You know, I'm not quite overweight Europe at the moment.
12:45We like Japan. We like India.
12:47And and then you'll just see how these other, you know, we'll be waiting for the
12:52trigger on on China to see if that really does come to be some deal that's not quite
12:56as negative as I have been assuming so far.