Jonathan Golub, Credit Suisse Chief U.S. Equity Strategist, joined The Final Round to discuss the relationship between stocks and the economy and his outlook for the market through the end of the year.
- New York for a bit more on what's make of the markets. A little mini correction here in September, what the rest of the year might have in store. We're joined now by Jonathan Golub. He is the Chief US Equity Strategist over at Credit Suisse. Jonathan, thanks so much for joining the show today.
So let's just start with kind of how you're thinking about the market right now, what we've seen in the last couple of weeks. We continue on this program to talk about a new phase for the market. Does it seem that way to you, or is this something investors are better off looking through?
JONATHAN GOLUB: I think if, you know, we look out six, 12 months, I think that this is going to prove to be just noise. I mean, the story for the last six months in the market is that better companies are delivering stronger returns. And, you know, if you look at the companies that are winning, and these are large cap growth companies largely in the United States, they have faster sales growth, earnings growth, less debt on their balance sheet. They're reinvesting more for the future.
The problem is is that many of these names were doing so well and money was piling so substantially into the same stocks they got ahead of themselves. The market slapped those-- you know, slapped them on the hand. They pulled back a little bit, and I think that we're in a pretty healthy position as we look forward.
Would I be buying the dip at this very moment? I'm not sure. But looking at six or 12 months, you know, these companies that have corrected most still looks like they're the healthiest names.
- And so then, you know, you talked about looking forward six to 12 months. As you look back six months and think about the rally we've seen off the March lows, what has-- how have the conversations you're having with clients changed over that time because, you know, it was kind of disbelief for a while in the spring there? And then it seemed that everyone kind of got on board with the rally towards the summer. But, you know, just given maybe that the change in tone and conversation that it seems like we're having here, not you and I, but us with other guests that things have changed yet again as we get into the fall.
JONATHAN GOLUB: Yeah, you know, the conversation, and we're still having the same conversation today. There's still 14 million Americans who are receiving unemployment benefits because they've been displaced I think there's something like 28 or 29 million Americans who are receiving some type of a government benefit to compensate them for lost wages, or business stress, or the like. So this is a really big deal that we're living through, and it's very easy for us to shrug our shoulders and say, oh, you know, this is fine.
It's not fine. And the fact that the stock market has done so well is really causing people to say, why is there such a disconnect between stocks that seem to be telling you everything's OK and the, you know, rest of the economy, which we know is saying otherwise? There's a lot of reasons for that.
The first thing is that the stocks that are in the S&P 500 are not necessarily reflective of the full economy. You know, if you look at the five biggest names, Google, and Apple, and Facebook, and Microsoft, and Amazon, you know, there's a theme here. These are the biggest, most successful tech companies. And the whole country obviously doesn't really doesn't reflect that. And also lower interest rates, just like they push up the value of a bond, lower interest rates push up the value of stocks, and we're seeing that impacting things as well.
- Yeah, and sometimes you hear people say, oh, the S&P, it's the world's biggest momentum strategy. But, you know, speaking of the S&P, you guys had a really interesting piece out last week about performance, and we just saw a change in components earlier this month, the performance of those stocks before and after they join the index. And I'm just curious what kind of your bigger takeaway is on the construction of the index because it is-- you know, we call it the benchmark index. Everyone looks at it-- on how the role of composition may be-- what role that plays in the performance of the headline index that, again, most people are looking at when they say, how is the, quote, unquote, "stock market doing?"
JONATHAN GOLUB: Yeah, you know, the reason that we wrote the piece was because there were some names that were dropping out of the benchmark because there were really small, and they were being replaced. And everybody thought that Tesla would be joining the S&P 500. I believe it's-- I don't know where it is this second, but at the time we wrote the report-- the seventh biggest company in the United States, one of the biggest companies in the world by market cap, not by sales or earnings, but by market cap. And they got passed over by the S&P committee, even though they'd met their criteria.
The S&P 500, for the most part, looks like the biggest 500 companies, but that's absolutely not-- you know, shouldn't be taken as, you know, the absolute truth or rule, if you will. It's representative of the largest companies in the United States, and there are some, you know, surprisingly large brand-name stocks that are not in there. But it, generally speaking, attracts the overall stock market pretty well.
- And then, Jonathan, quickly before we let you go, third quarter earnings season coming up here in just a couple of weeks. Second quarter, we obviously saw kind of beats everywhere, guidance better than expected for the companies that offered it. What are you kind of looking for as we head into third quarter reporting period?
JONATHAN GOLUB: I would actually say that there's two stories in the second quarter, and we'll see how it plays in the third. The first was the size of the beats were bigger than anything we've ever seen. You know, going back in history, we have about 30 plus years of tracking beats and misses, not Credit Suisse, but that's how long the data has been available in the industry. This was the single best quarter we've ever had in that 30 years.
However, the market's response to big beats was the smallest we've ever had. The market basically said, this environment is crazy. It's really hard to reward a company that, you know, is beating a really-- you know, a very low number. So I think that it very well could be the same kind of thing where the setup is for earnings to be pretty good and the market is still-- especially with all of the election issues and other macro concerns that are out there, I could see the market again ignoring what may turn out to be a really good earnings season.
- All right, Jonathan Golub is the Chief US Equity Strategist at Credit Suisse. Jonathan, thanks so much for joining the program. We'll talk to you soon.
JONATHAN GOLUB: Thanks.