The 'Big One' is Here... Apparently.

Summary

The video discusses the media's portrayal of a potential US recession and its impact on stock market volatility. It challenges the notion that market declines are solely due to recession fears, highlighting other factors like the unwinding of the Yen carry trade and Warren Buffett's Apple stock sale. The script emphasizes the outsized influence of the 'Magnificent 7' tech companies on the S&P 500 and suggests that investor sentiment towards AI and these companies is a significant driver of market movement. It also advises against making investment decisions based on recession speculation, advocating for a long-term focus on business performance.

Takeaways

• 📉 The stock market experienced a significant drop due to fears of a potential US recession, with media outlets widely covering the event.
• 🏦 Financial institutions like Goldman Sachs and JP Morgan have raised their estimates for the probability of a US recession, with some estimates as high as 40%.
• 📈 Despite concerns of a recession, the stock market's decline was not solely due to recession fears but also due to other market events, such as the unwinding of the Yen carry trade and Warren Buffett selling Apple stock.
• 📊 The Bureau of Labor Statistics reported weaker job growth and a slight increase in the unemployment rate, contributing to recession concerns.
• 📉 The S&P 500 and other major indices saw sharp declines, but the media's attribution of these declines to recession fears may be overstated.
• 🤖 The 'Magnificent 7' tech companies have a significant impact on the S&P 500, with their performance driving market sentiment and volatility.
• 📊 These tech giants have seen their valuations soar, with many trading at high price-to-earnings ratios, indicating investor expectations for future growth.
• 📈 Despite solid earnings reports from some of these companies, the market reaction has been mixed, with stocks falling post-earnings in some cases.
• 🔄 There is a growing sentiment that small-cap stocks may start to outperform large-cap tech stocks, indicating a shift in investor focus.
• 💡 The key driver of the stock market's movements is investor sentiment towards the 'Magnificent 7' and their potential in AI technology.
• 🗣️ Speculation about a recession is rampant, but the actual timing and occurrence of a recession are uncertain, and investment decisions should not be based solely on such speculation.

Q & A

What is the main topic of the video script?

The main topic of the video script is the speculation about a potential US recession and its impact on the stock market, particularly focusing on the role of the 'Magnificent 7' companies.

Which companies are referred to as the 'Magnificent 7' in the script?

The script does not explicitly list the 'Magnificent 7' companies, but it implies they are major tech companies that have a significant influence on the S&P 500 index.

What is the significance of the 'Magnificent 7' in the context of the S&P 500?

The 'Magnificent 7' are significant because they account for about 30% of the S&P 500's gains and are responsible for a large portion of its movements, making the index more concentrated than ever.

What factors have been cited as reasons for the recent stock market volatility?

Factors cited include the unwinding of the Yen carry trade, Warren Buffett selling large amounts of Apple stock, and investor sentiment towards the 'Magnificent 7' companies, especially in relation to their valuations and growth expectations.

How did the script describe the media's role in the perception of a potential US recession?

The script suggests that the media has played up the possibility of a US recession, attributing market declines to recession fears, which may not be the sole cause of the market volatility.

What is the role of investor sentiment in the current stock market situation according to the script?

Investor sentiment, particularly around the 'Magnificent 7' companies and their association with AI technology, is a major driver of the stock market's movements, with the potential for volatility as sentiment changes.

What was the script's stance on the predictability of a US recession?

The script suggests that predicting a recession is uncertain and that investment decisions should not be based on speculation about a recession.

What does the script suggest about the long-term performance of the stock market?

The script implies that in the long run, stock market performance reflects the long-term business performance, as opposed to short-term sentiment or speculation.

How does the script relate the actions of Warren Buffett to market sentiment?

The script suggests that Warren Buffett's decision to sell Apple stock might have prompted other investors to reconsider their investments in tech stocks, highlighting the influence of such actions on market sentiment.

What is the script's advice for investors regarding the current market situation?

The script advises investors to focus on the long-term health of businesses and their cash flow, rather than getting caught up in short-term market volatility or recession speculation.

What is the significance of Seeking Alpha in the context of the video script?

Seeking Alpha is mentioned as a sponsor of the video and as a resource the speaker uses to analyze businesses and earnings, providing insights into company performance and investor sentiment.

Outlines

00:00

📉 Stock Market Volatility and Recession Fears

This paragraph discusses the concerns of an imminent US recession, fueled by media coverage and financial analysts' predictions. It mentions the stock market's significant drop, attributed to recession fears, and highlights the role of weak jobs data, rising unemployment, and stable interest rates. The speaker challenges the media's narrative by pointing out other market events, such as the unwinding of the Yen carry trade and Warren Buffett's sale of Apple stock, which may have contributed to the market turbulence. The focus then shifts to the 'Magnificent 7' tech companies, which are driving market sentiment and whose volatility is a significant factor in the stock market's current state.

05:00

🚀 The Impact of Tech Giants on Market Sentiment

The second paragraph delves into the disproportionate influence of seven major tech companies on the stock market, despite their high valuations and varying earnings performances. It discusses how these companies' stocks have been bid up on the promise of future growth, particularly in AI technology, and how any deviation from flawless growth could lead to significant stock adjustments. The paragraph also touches on the market's reaction to these companies' earnings reports, showing a trend of volatility and investor sentiment shifting between belief in their potential and skepticism about their valuations.

10:01

💡 Long-Term Investing and the Futility of Recession Speculation

In the final paragraph, the focus is on the importance of long-term investing and the pitfalls of basing decisions on short-term market fluctuations or recession speculation. It emphasizes the unpredictability of market movements and the value of focusing on a company's fundamental performance over time. The speaker uses the teachings of renowned investors like Warren Buffett and Benjamin Graham to illustrate the point that stock prices reflect long-term business performance, not short-term sentiment or speculation about economic downturns.

Keywords

💡Seeking Alpha

Seeking Alpha is a platform for investment research that offers a variety of content, including analysis and opinions on stocks, ETFs, and other investment topics. In the video, it is mentioned as the sponsor, offering a premium service with a 7-Day free trial and a discount on the annual subscription, which is a key promotional aspect of the video's introduction.

💡Recession

A recession is a period of negative economic growth that lasts for at least two consecutive quarters. In the video, the concept of a potential US recession is central to the discussion, as it explores the impact of such economic conditions on the stock market and investor sentiment, with references to various financial institutions adjusting their predictions for the likelihood of a recession.

💡Stock Market Volatility

Stock market volatility refers to the rapid fluctuations in the prices of stocks and the overall market indices. The video discusses this in the context of the recent dip in the US stock market, attributing it partly to fears of a recession, but also highlighting other factors such as the unwinding of the Yen carry trade and Warren Buffett's sale of Apple stock.

💡The Magnificent Seven

The term 'The Magnificent Seven' is used in the video to refer to seven major tech companies that have a significant influence on the S&P 500 index. These companies are said to account for about 30% of the index's value, indicating their outsized impact on market movements, which is a key point in the analysis of market volatility.

💡Investor Sentiment

Investor sentiment is the overall attitude or mood of investors toward the market or a particular security. The video emphasizes that investor sentiment, particularly around the seven major tech companies, is a major driver of the stock market's current volatility, rather than solely macroeconomic indicators or the fear of a recession.

💡AI (Artificial Intelligence)

Artificial Intelligence, or AI, is the development of computer systems to perform tasks that would normally require human intelligence, such as visual perception, speech recognition, and decision-making. In the video, AI is presented as a key technology that investors are betting on, with the market capitalizations of the seven companies being significantly influenced by expectations of their future growth in AI.

💡Earnings Estimates

Earnings estimates are predictions of a company's future earnings per share, which are used by investors to value stocks. The video discusses how companies like Tesla and Google have performed relative to these estimates, with the market reacting to both beats and misses, indicating the high expectations placed on these tech giants.

💡Market Capitalization

Market capitalization, or market cap, is the total value of a company's shares of stock, calculated by multiplying the number of shares by the current market price per share. The video points out that the market capitalizations of the seven tech companies have been inflated beyond their current earnings due to investor expectations of future growth, particularly in AI.

💡Warren Buffett

Warren Buffett is a renowned investor and the chairman and CEO of Berkshire Hathaway. In the video, his decision to sell large amounts of Apple stock is highlighted as a significant market event that contributed to volatility and prompted other investors to reassess their positions in tech stocks.

💡Benjamin Graham

Benjamin Graham is considered the father of value investing and author of 'The Intelligent Investor.' The video quotes him to illustrate the long-term perspective investors should have, emphasizing that stock prices in the long run reflect the underlying business performance rather than short-term market sentiment or economic cycles.

Highlights

Video sponsored by Seeking Alpha, offering a 7-Day free trial and $25 off annual subscription.

Media frenzy over potential US recession following stock market dip.

Goldman Sachs and JP Morgan increase odds of US recession, with estimates ranging from 25% to 40%.

Weak jobs data, rising unemployment, and persistent inflation contribute to recession fears.

Stock market volatility not solely due to recession fears, but also other market events.

Unwinding of Yen carry trade and Warren Buffett's Apple stock sell-off as significant market events.

The 'Magnificent 7' tech companies contribute disproportionately to S&P 500 movements.

Investor sentiment around AI and these top companies is a major driver of current stock market trends.

High market capitalizations of these companies relative to their earnings indicate risky valuations.

Seeking Alpha's valuation ratings show 'F' grades for major tech companies, signaling overvaluation.

Even with solid earnings, stock prices of these companies are volatile due to high expectations.

Tesla and Google examples illustrate the impact of earnings reports on stock prices.

Shift in market sentiment suggests small-cap stocks may outperform large caps going forward.

Volatility in the market linked to changing perceptions of tech stock values.

Speculation about recession is uncertain and not a reliable basis for investment decisions.

Benjamin Graham's quote emphasizes the long-term reflection of business performance in stock prices.

The importance of focusing on long-term business health over short-term market fluctuations.

Seeking Alpha premium as a valuable resource for daily business analysis.

Transcripts

this video is sponsored by Seeking Alpha

sign up to Seeking Alpha premium using

my link to score a 7-Day free trial and

$25 off your annual subscription is the

US really headed for a recession a week

ago you probably saw the stock market

take a decent dive on fears of an

imminent us recession and the media had

an absolute field day with this Forbes

jumped on it as did the Washington Post

CNBC alzero the BBC the list goes on

it's a clicky subject people love

negative news especially when it touches

on the topic of a potential us recession

but do they have a point Goldman Sachs

recently raised the odds of a US

recession from 15% to 25% JP Morgan

raises recession probability to 35% and

their CEO Jamie Diamond recently stated

in an interview that he thinks the

probability could now be as high as 40%

as time goes on these estimates keep

getting higher and higher and with weak

jobs data being released in the US a

couple of weeks back unemployment Rising

inflation hovering around 3% and

interest rates unlikely to be lowered by

a meaningful amount in the near future

could the US actually be one wrong turn

away from a recession well firstly I

want to address the stock market

volatility we've been seeing as nearly

every news Outlet last week attributed

the sharp decline in markets to concerns

around an impending us recession and

that's not entirely the case it is true

that the market had a particularly bad

day on Monday the 5th the S&P 500 the

index of the 500 largest stocks in

America fell 3% the tech heavy NASDAQ

fell 32% and the Dow Jones dropped over

1,000 points to finish 2.6% down down

but a lot of people were quick to pin

this on an increased likelihood of a US

recession and this messaging came after

the release of the most recent jobs data

if you missed it the Bureau of Labor

Statistics noted that in July just

114,000 jobs were added in the US which

is down substantially from the figures

seen in May and June and looking at the

unemployment rate in the US while it's

still quite low it has slowly been

trending up over recent months so that

combined with cooler but still

reasonably persistent inflation and the

reality that interest rates will

probably stay restricted for quite some

time are causing people to worry about a

recession coming soon but is this really

what's moving the markets is a potential

us recession really affecting the stock

market as much as the media are trying

to force us to believe well even looking

at that week of the major Market

turbulence if you actually look behind

the curtain even on Monday alone there

were two completely different Market

events that happened last week which

probably caused the stock market

shakiness you had the unwinding of the

Yen carry trade which has been covered

extensively across YouTube and you also

had the world's best investor Warren

Buffett dumping huge sums of Apple stock

back into the market and after

commentary from Buffett earlier in the

year saying he's comfortable trimming

Apple to hold more cash seeing him make

such a big move likely prompted many

investors to reconsider their

investments in the highflying tech

stocks the news caused Apple to fall

around 5% but this really just

highlighted a much bigger Trend we've

been seeing in the Magnificent 7even

over the past month the reintroduction

of volatility in these seven business

businesses and if you ask me this is

really where we see the big overarching

story of what's driving the stock market

right now if we look at the current

trends of the S&P 500 we can see since

July it took a dive and then recovered

but look at this when we look at the

price charts of The Magnificent Seven

companies notice something since mid

July these businesses have tanked and

then recovered and you can say well of

course these stocks will move up and

down as the market does but it's

actually the other way around these s

stocks are the market the Magnificent 7

even after their big dip and Recovery

across the past month still occupy about

30% of the S&P 500 the S&P 500 is more

concentrated than it ever has been this

article I was reading on Seeking Alpha

noted that out of the entire upward

movement of the S&P 500 this year

onethird of it was down to just these

seven businesses appreciating 7even out

of 500 businesses accounted for 30% of

the gains think about that and

ultimately what this means is that

changes in sentiment in just these seven

businesses have an outsized impact on

the broader Market the media can talk

about an imminent recession or the

upcoming election or even interest rate

changes but ultimately the bigger mover

of the stock market right now is going

to be investor sentiment around these

seven companies and the reason this

group of stocks is particularly volatile

right now rising and falling so sharply

is because they have been bid up to the

Moon because the big money has declared

the AI is the future and these seven

stocks will will be the beneficiaries of

this technology what we've seen is

insane amounts of money flowing into

these stocks swelling their Market

capitalizations along Way north of their

current earnings investors are making

their bets on AI early and then hoping

the earnings catch up later for example

if we take a look at the valuation

ratings from Seeking Alpha we can see a

bit of a theme for where their earnings

are at currently Google gets an F Amazon

gets a D minus meta gets an F Tesla gets

an F Microsoft gets an F Apple gets an f

and Nvidia gets an F compared to where

their profits are today these businesses

have been bit up so high that they need

to continue growing flawlessly to

satisfy investors and even one minor

slip up could equate to a much harsher

stock adjustment than you'd normally

expect take Tesla for example they beat

Revenue estimates but missed on earnings

per share estimates and even though it's

common knowledge that the car industry

is cyclical and Tesla is having to lower

prices and they're dealing with more

Chinese competition and the stock fell

12% post earnings they still have a PE

ratio of around 56

very very high or what about a company

on the other end of the Spectrum in

Google posting really solid earnings

numbers Revenue up 13% year of year net

income up 28% year of year 10000 billion

of cash on the sidelines and only 12

billion in long-term debt they're doing

everything right but when they posted

earnings somehow they still fell 5% and

it was because investors found a teeny

tiny Mist expectation in their YouTube

revenue and this is actually a really

interesting stat on Seeking Alpha you

can really easily see where the

companies beat or Miss earnings and take

a look at this meta beat estimates on

their Q2 earnings Google beat estimates

Microsoft beat estimates Apple beat

estimates Nvidia beat on their last

earnings in May Amazon beat on EPs and

missed slightly on Revenue Tesla missed

on EPS but beat on Revenue but despite

this overall solid earnings performance

after their earnings were released all

of them took a massive dive now they

have since recovered but this choppy

movement really speaks to the bigger

problem causing the US market to bounce

around at the current time and it's

exactly what this headline is alluding

to up until now the Magnificent 7 could

do no wrong it's been nothing but growth

and nothing but hype but now things are

just starting to change it seems at

least for some that the shine is

starting to wear off on the massively

hyped tech stocks and it's becoming a

battle between the out andout Believers

and those that think these stocks are a

bit overblown and this seesing consensus

is leading to a lot more volatility that

we have seen I mean take the company

Warren Buffett sold in apple if he

thought the business was set for gang

bust the growth from their efforts in Ai

and the valuation was fair there's no

way he'd be selling but take a look at

Apple over the past few years Revenue

has stagnated as has their operating

income sure Apple can do tens of

billions in share repurchases to Goose

the numbers but at the end of the day

investors are expecting more than that

at a PE of 33 and as I spoke about in

another video recently the sentiment

seems to now be changing so much so the

Bank of America Global researchers

expecting earnings growth in the small

cap stocks to start outpacing that of

their large cap peers at a trend that

was drawing money out of the big Tech

behemoths and back into the small

companies in the market but now is just

adding to the volatility in the market

so while we might see news sites linking

the performance of the stock market to a

US recession or macroeconomic factors

like jobs data or currency fluctuations

with the Japanese Yen the main thing

that's going to really dictate the

near-term performance of the S&P 500 is

really what happens to these seven

businesses that collectively hold

onethird of its weight if investors stay

excited about AI the market will likely

keep going up but if AI loses its luster

or if these companies stop posting such

strong growth numbers then you can

expect the broader Market to fall and to

specifically hone in on the topic of a

potential us recession it's important to

remember that while you hear a lot of

speculation online the truth is nobody

knows for certain if or when one might

come along and it's pointless to try to

make investment decisions based on that

information I mean the funniest thing is

when I started writing this video in the

midst of last week's sell off all of the

Articles were talking about how the US

is definitely headed for recession but

since I started writing the crazy thing

is the market has almost completely

recovered it's now down only 2% from its

all-time high and what's even funnier is

now the news articles are talking about

how the US isn't going into recession

look at this from last week when we saw

articles that Goldman Sachs raised its

recession probability to 25% this week

the article is Goldman Sachs lowers its

recession probability to 20 % you can't

make this stuff up one week later and

all is well again the value of retail

sales increased in July by the most

since early 2023 government figures

showed the fewest applications for

unemployment benefits last week since

early July it just goes to show that you

really cannot buy into this recession

chatter one week it's Doom and Gloom and

the next it's clear skies honestly to

keep myself grounded I always like to

think about what the world's best

investors would say in these sorts of

scenarios the Warren buffets or the

Charlie mungas or the Benjamin Grahams

and a great quote about the stock market

that comes from benang Graham is in the

short run the stock market is a voting

machine but in the long run it is a

weighing machine and what this means is

that over a period of weeks or months or

sometimes even years the stock market's

movements are really just a result of

what people think if they're excited

stock prices rise if they're pessimistic

stock prices fall and you cannot control

that at all so the only way around this

as an investor is to think longterm in

the long run stock prices ultimately

reflect the long-term business

performance right there was a lot of

pessimism about Amazon and the tech

bubble that drove the stock down but in

the long run the stock performance is a

result of what that business has been

able to achieve over time so I think

it's important to detach what you're

seeing here in the media on the

day-to-day and think along those lines

at the end of the day Google stock will

go up and down based on what investors

think about Ai and it will also go up

and down based on whether or not the US

goes into recession but right now Google

produces $5.50 per year in free cash

flow for each one of its shares and and

over the long run if the business stays

healthy and that number continues to

Trend up the long-term trend of the

stock will also be up you can say that

for any business in your stock portfolio

and I think it's important to remember

that in times like these also wanted to

again thank Seeking Alpha for sponsoring

this video as I'm sure you could tell

throughout the video Seeking Alpha

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use on The Daily when looking into

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recommend checking them out but with

that said thanks very much for watching

guys and I'll see you all in the next

video

[Music]