The big fear right now david is the Silliness over breadth five stocks going Up everything else terrible and the fear Of a drawdown tie the two together Well the the subject of a drawdown of Course will bring happiness to lisa to Hear about that but the idea of a Narrowing breath market is i think an Important characteristic of the last six Months so there's been a relatively few Stocks that have driven the market uh to These pretty much record levels and the History would suggest That over the next three to six months You'll get a larger than average a Deeper than average drawdown say for Example instead of a four percent Drawdown over time over a couple months Period you may likely get an eight Percent drawdown That's what history would suggest Once there's such a significant Narrowing of breadth in the market However if you think about where you end The uh not just the year but over that Period of time equity prices likely to Be higher why is that the case all of The focus today and your conversations Before have been about the announcement Of the fed today and the dot plot and The tapering all those are important but The fundamental issue in equities has Been this year you've had a huge spike In commodities you've had supply chain
Disruption you've had difficulty in Companies finding and keeping employees And you've had the variance the delta And nana omicron all these issues yet Profit margins in the united states Across every sector are at record high Levels managements have been very nimble In Basically dealing with these uh these Issues and so we look into 2022 earnings Up around eight percent largely the Economy is still growing at a Decelerating pace margins increasing Slightly that is the story for 2022 you Have a flat valuation in my opinion That's how you get to One hundred all right up roughly ten Percent maybe eleven percent total Return when you add in dividend yield so David just to be clear i'm not rooting For uh a down draft here but i do think A lot of people have been talking about How things look perilously valued your Argument is they are not because you're Going to get the ongoing uh margin and Sort of incremental growth in terms of How much they're expanding what's the Down case scenario just because i want To be in brand here you know what's the Sense that we're going to get some kind Of rate hike or savings accounts that Get depleted and the consumers say no Moss we're not going to accept and give You money and not only pay you enough
For more inflation but then more So lisa the disconnect and the Discussion with most portfolio managers Relates to the uh situation that fast Growing Companies that are fast profit forecast Fast fast profit growth and high margin Companies trade at race basically the Same Valuation as fast growing but negative Margins losing money or very thin uh Profit margins those two uh Groups of stocks is anomalous that they Would be trading at roughly the same Valuation uh to give you a number Roughly sort of nine times enterprise Value to sales what are we talking about We're talking about companies with a Forecast of say 20 revenue growth uh Both sides but some are having 20 Margins others basically companies Losing money and the issue is as rates Go higher and to be clear that is the Forecast of goldman sachs that 10-year Treasury yields will climb towards Around 2 at the end of next year in that Environment it is exceedingly unlikely That you get the same valuation for These two groups of stocks and the idea The market is unforgiving if companies Which have high revenue growth and all The valuation is dependent on that Revenue growth as compared with Companies where there's rapid revenue
Growth but there's also high profit Margins to work with that's the central Tension in most conversations with fund Managers because so many of the money Losing loss Growth stocks are very much in the meme Spectre or the uh so the glamour stocks In the market that everyone has has been So benefited from in the profit over the Last couple of years in terms of Performance david the obsession now as You know is to look forward 12 months Can we just reflect on the last 12 Months briefly i remember about 12 Months ago looking at your original Forecast for the s p 500 which was 4 300. and when that first came out i Think the s p was in and around 3 500. And we looked at your forecast looked at Jp morgan's which was a little bit Higher and everybody sat there and said Come on this is ridiculous we're really Going to have a year that big we broke Through 4 700 before we got to the end Of the year david i want to understand From your standpoint when we play this Game each and every year at this time of Year when you look back 12 months what's Been the biggest lesson for you and the Team as you speak to clients So the biggest lesson and you're right At this time last year our forecast for The s p 500 at the end of 2021 was 4 300 And we lifted that to 4 700 in august
The biggest surprise has been the Resilient in my opinion the biggest Surprise has been the resilience of Corporate margins uh and that's been a Key driver of why you've had uh earnings And it's really been an earnings-led Market i think that's really the most Important development it has not been a Valuation expansion story it's been a Earnings-led market and i look into 2022 Jonathan and that is the same outlook That we're anticipating which is Earnings climbing around Eight percent the other aspect that was Surprising to me is all year long and When you've invited me on as a guest Most of this year we've been looking and Handicapping the probability of a higher Corporate tax rate we were assuming most Of this year there would be some Legislation passed some reconciliation Legislation Passed this year and affecting and Headwind to profit growth next year but Now it looks as though whatever Legislation may or may not be passed and I do expect some legislation be passed But that tax headwind tax hike will not Affect company profits until 2023 so Basically that extra earnings in yours In yours to the investor that's the Other so profit margins and the lack of An increase in tax legislation i think Have been two surprises to me david your
Distinction is you say just shut up and Own them own high growth own high margin Own high profit stocks and there's x Number of those as well Are they under own or over owned right Now Uh well it depends if you want to talk About the hedge fund community or the Mutual fund community so tom that makes A difference please make some Distinction Which which clients uh we're looking at So if you look at the hedge fund Community the leverage community Basically owning the Leading stocks in the market uh that's Been persistent for 20 years we look at This every 90 days and been looking at This since 2001 and that's been pretty Much in the last you know four or five Years the same stocks the leading stocks In the market largest companies in the Market have been dominating their Performance and In their portfolios uh and that's pretty Much in Similar to the whole index if you will If you're looking and so they're Overweight those stocks and then you Look into the mutual fund area and They're significantly underweight and Here we're looking at large cap core Managers value managers looking at a Different benchmark and growth managers
But in terms of your core mutual fund Managers they're actually underweight Those larger stocks in part because They're such a significant waiting in The market right five stocks 25 on the Market david i want to come back to you On multiples we talked a lot about Earnings it's been the big surprise of This year you're talking about earning Speed the big surprise for next year too Potentially let's just sit on multiples For a moment there's been some confusion Around why multiples are so elevated i Want to understand what it is from your Perspective is it that early recovery Where earnings start to deliver upside Surprise beat and raise beat and raise That's where deutsche bank sit on the Idea or is it the fact that rates are Low and of its rates what does that mean For the fed and what that means for Multiples going forward can you give me Your view on that right now david So we think about valuation on an Absolute metric if you look at Enterprise value to sales enterprise Value to ebitda price earnings multiple Any of those metrics the equity Valuations are extremely high i would Say the rationale for the market Being reasonably attractive does depend On the extremely low interest rate Environment that we have whether that's Corporate bond yields tips uh inflation
You know protected securities or even Nominal treasury yields and all those Interest rate related metrics equities Look reasonably attractive so jonathan An important construct to think about Is that in history it shows Six months Before a fed hike Six months after a fed hike that one Year period basically you have multiples Flat in every one of the tightening Regimes that you've seen over time That's been the experience and so that Happens to match up pretty closely with Calendar year 22 coincidentally you're Starting now it's about six months Before the expected first hike and six Months after would of course put you at The end of 2022. that's not the forecast For a stable multiple that's not upon Which we make debate the forecast but as A result that's consistent with history The way we think about it is rates are Going higher risk premium going a bit Lower why is it a bit lower consumer Confidence remains high unemployment Falling and wages are increasing number One and number two the policy Uncertainty i referenced earlier about Tax hikes uh the election for next November so once that's beyond us you'll Be basically back to a roughly stable Valuation around 20 to 21 times which is The valuation now historically high but
Still reasonably attractive in a Low interest rate environment even with Rates rising
