• Darrell Cronk
    Tech balance sheets are pristine with plenty of cash, good credit quality, and leading shareholder yield at about five and a half percent.
  • What does the market need to see in this earnings cycle given geopolitical uncertainty?
    A lot of companies could probably fall back and say, listen, there's a war out there. We don't know what's going on with our business.
    Paul
  • Darrell Cronk
    The market doesn't care much about this quarter's reported earnings (expected up 13% on Q1, forward 12-month earnings up 17-18%); it's all about forward guidance for Q2 and Q3.
    This is the sixth straight quarter of double-digit earnings growth. Big banks and financials plus tech are 46% of S&P market cap, so their guidance will drive the market.
  • How do you think about allocation given tech's recent strong performance after earlier rotation?
    Towards the end of last year we had a rotation out of some tech names, maybe a broadening out looking for value, but tech has come ripping back this month.
    Paul
  • Darrell Cronk
    We downgraded tech on Oct 30, upgraded on April 6; it traded sideways between those dates but is up 11% in the last two weeks. Funded the upgrade by selling energy.
    When we did that trade on April 6, oil was at $105, energy stocks were elevated; energy is down about 6% since, making the tech-energy pairs trade accretive.
  • Are you concerned about impacts on economic growth and inflation from higher-for-longer energy prices?
    Paul
  • Darrell Cronk
    The equity market is a reaction function to oil prices and interest rates. The 10-year at 4.30% needs to be higher.
    The old rule of thumb is the 10-year should equal nominal GDP, which easily has a 5 in front of it. The yield curve has to go higher due to inflation premiums and growth themes, which will cause indigestion.
  • Can you be optimistic about genuine positive real wage growth affecting yields?
    The way to drive price down and yield up is surprising productivity and wage growth.
    Paul
  • Darrell Cronk
    Yes, we already saw it; the economy was going to run hot coming into March, driven by wage growth, and even geopolitical conflict hasn't dented that.
  • How do you account for big tech valuation given they don't pay dividends? Take Microsoft as an example.
    You've got dividend discount model, Gordon growth model, but never talked about is the oddity of big tech residual income model. They don't have a dividend, so you have to sum all their cash flows.
    Paul
  • Darrell Cronk
    Microsoft is way more valuable than current price suggests; you value them on free cash flow generation. Tech is a free lunch: paying market multiple (20-21x) but getting double the earnings growth (35% vs 17%).
    Valuations aren't remotely stretched at 20-21x for tech when you're paying the same for the market.
  • What are we doing in the bond market? Are we taking credit risk?
    Paul
  • Darrell Cronk
    No, stay up on credit quality. You're not getting compensated enough on high yield spreads.
    If the economy runs hot, you'll be okay down the credit stack in high yield, but it's not going to be any big trade that makes a lot of money.
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