Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why The S&P 500 Is Breaking Records On Weak Growth
Transcript
- Lucas: If our money conversations have helped you think about a decision differently, then you already know why we do this. A couple of dollars a month is genuinely what keeps these going, so if you've gotten something out of them, buy me a coffee dot com slash fexingo. Luna: It really does add up when you think about it, yeah. And honestly, having that stability means we can keep digging into the messy stuff without worrying about the lights going out. Lucas: Exactly. And speaking of messy, let's talk about the numbers on the board right now. The S&P 500 is sitting at seven thousand six hundred fifty-seven, which feels like a historical high, but the underlying engine is sputtering in a way most headlines aren't capturing. We are seeing a market that is pricing in optimism while the actual economic data suggests we are running on fumes. Luna: Right, and that dissonance is exactly what makes this week so tricky for anyone trying to allocate capital with any sense of certainty. Lucas: Let's drill into the disconnect. Nominal GDP for the latest quarter came in at thirty two trillion four hundred eighty-six billion dollars, which sounds robust. But look at the real GDP growth, which has dropped to one point five percent annualized. That is not a boom; that is a crawl. Yet, equities are rallying. How do you reconcile a slowing real economy with an expanding stock index? Luna: You don't reconcile it by looking at earnings per share alone. You look at the cost of money and the return of capital. When rates are flat at three point six three percent, companies can still borrow cheaply to buy back their own shares, artificially inflating EPS even if revenue growth stalls. Lucas: That is the key. It is financial engineering masquerading as organic growth. Think about the big tech conglomerates. They aren't necessarily growing their user bases exponentially anymore, but they are using free cash flow to reduce share counts. So, even if the pie isn't getting bigger, each slice is being claimed by fewer shares. That creates the illusion of strength in the P/E ratio expansion. Luna: But doesn't that create a fragility? If the narrative shifts from 'buybacks support the price' to 'growth must drive the price,' those multiples could compress very fast. Lucas: It absolutely creates fragility. And here is where the consumer angle gets interesting. We have headlines saying inflation is outpacing wage growth again, squeezing Americans' paychecks. If the real GDP is only one point five percent, that largely reflects weak consumption. The consumer is tapped out. They aren't buying more goods, so corporate revenue growth should be slowing across the board. Luna: So why is the market ignoring the wage squeeze? Usually, when real wages lag inflation, you see a pullback in discretionary spending stocks first. Lucas: Because the market is forward-looking, and currently, it is betting on liquidity, not labor. The Fed Funds effective rate is flat at three point six three percent. Interest on reserve balances is holding steady at three point six five percent. There is no tightening pressure. When liquidity is abundant and yields are stable, capital flows into assets that offer yield relative to bonds, which happens to be large-cap equities. Luna: It feels like we are watching a balance sheet game rather than an income statement game. The companies with the strongest balance sheets are winning, regardless of how many widgets they sell. Lucas: Precisely. Look at the divergence between the S&P 500 and the Russell 2000. The small caps are down two point four percent over the last five days, while the large caps are barely down half a percent. Small businesses rely on consumer spending, which is constrained by that wage-inflation gap. Large caps rely on global scale and capital structure, which is insulated by low borrowing costs. Luna: So the 'broadening' rally everyone hopes for isn't happening because the foundation is rotten for everyone except the giants. It is a concentration risk disguised as diversification. Lucas: I would call it a liquidity trap for the uninitiated. Investors see the S&P 500 hitting highs and assume the whole economy is healthy. But if you look at the ten-year Treasury, or even shorter-term instruments, you see that the cost of capital is effectively frozen. That freezes the discount rate in valuation models, keeping present values high even if future cash flows are uncertain. Luna: And that brings us back to the Goldman picking China healthcare stocks headline. Are we seeing a rotation out of US mega-caps into emerging markets because the US valuation premium is too high? Lucas: Maybe, but I think it is more about seeking yield in places where the central bank hasn't tightened as much. However, the primary driver here is still domestic. The US market is up because US corporations are efficient at returning cash. It is a self-fulfilling prophecy. As long as buybacks continue, EPS grows, and the index rises, regardless of the one point five percent real GDP growth. Luna: It is a bit terrifying when you put it that way. The market is essentially voting with its wallet that capital allocation matters more than operational expansion. Lucas: Until it doesn't. Because eventually, the debt comes due. Or the consumer stops paying. Or the Fed decides that zero volatility is actually bad for innovation and hikes rates. Right now, though, the path of least resistance is up, supported by that wall of mediocre growth and generous liquidity. Luna: So for listeners holding positions, the advice is basically 'stay in the quality names that can afford to buy back stock,' right? Lucas: For now, yes. Avoid the small caps bleeding out in the Russell. Stick to the companies with fortress balance sheets. The data from September thirteenth shows that momentum is still with the large caps, even as the broader economic indicators turn red. Luna: It is a strange time to be a value investor, watching growth stocks stay expensive because the alternative—cash—is yielding nothing interesting after taxes. Lucas: Exactly. Cash is trash, but only because the Fed made it trash by keeping reserve balances at three point six five percent. If that number moves, this entire house of cards wobbles. Until then, we ride the wave of capital returns. Luna: A wave that looks less like swimming and more like floating on a raft made of repurchased shares. Lucas: A very sturdy raft, apparently. For now. But remember, real GDP is one point five percent. That is not a number you build a retirement portfolio on without hedging your bets against a sudden shift in monetary policy. Luna: Or a sudden realization that the consumer has finally reached the end of the rope. Lucas: We will see who blinks first. The market or the paycheck. Luna: I suspect the market won't blink until the Fed does. Lucas: Then we watch the FOMC minutes closely. But for today, the S&P 500 is king, backed by liquidity and buybacks. Luna: And that is a story worth knowing before the next earnings season starts. Lucas: Agreed. Let's keep an eye on those reserve balances. Luna: Always.