The Equity Markets Are Insane Right Now | Jan van Eck

the equity markets and if you've seen semiconductors, you know, who have doubled in the last 12 months or more, memory stock companies, the stocks of memory companies, excuse me, I mean, there's insanity going on in the equity market. So, I do want to really, you know, Adam, you and I have never ever experienced the kind of appreciation that sectors of this market are providing and the related profit growth. So I want to walk through that.

It's great to be back, Adam. I really look forward to these quarterly catchups.

Oh, I love history and two of my four children were born on the 4th of July. My twins. So, it's Sam and John. Is that their names?

Wait, wait a second.

It's it's Wait, John. John Adams and Thomas Jefferson. Didn't they both die? Actually, one is named Theodore, but he's named after a president, but not a founder. It would have to be, you know, who hated each other? They twins get along great. But yeah, Jefferson and Hamilton, I guess. Right.

Um just one of the great 50 years after the signing of the Declaration, to the day. It's kind of spooky that people never really mention it.

I know it really is one of the great coincidences of fate. But anyways, last time you were on, if I recall correctly, you recommended a book for folks to go read. I know you said 1776 was a book that you really liked about the founding of the country, but there was another one. I'm blanking on the title. But you are a big student of history, American history in particular. Yeah, I think it's, you know, so many people don't really know the basics and it's great to go over the basic principles of our country, which of course are freedom but also the balancing of power within the government, right? So that we don't go too crazy and different branches interact and survive for 250 years. It's kind of amazing. The book that I was recommending or do recommend is Founding Brothers by Joseph Ellis, because it kind of gets at the principles that people believed but also a little bit the personalities without focusing too much on one founder or the military stuff, which I don't think is of lasting interest.

Joseph Ellis.

But you know, I've been like many people reading up and brushing up on my Revolutionary War history leading up to the fourth. And it's amazing because there was just as much disagreement and political friction going on back then as we've had throughout American history. And they were doing all this under duress in a short period of time. And it's just amazing how much they got right, how much of what came out of all that chaos and disagreement has been this founding structure that has endured and inspired so many other countries. It really is pretty amazing. We're fortunate to have had the people in place at the time and some of these people are some of the smartest Americans that we've ever had. But the odds of them getting that much right in one sort of desperate attempt is mind-boggling to me.

Yeah. I mean, there's a book called The Miracle. And it talks about the declaration and it is sort of an amazing coincidence. I think the other thing that's underappreciated is how impactful it was for the world, right? Because most of the world was monarchies at the time and this is the first really democracy, right? And those ideas transmitted to France which had violent consequences and elsewhere. And a British historian would say it was just part of the arc of power going to parliament over time. But still, I think this was a huge step forward in world history.

Um, well, listen, I'm going to review kind of what we talked about last time about halfway through the deck, but I know you always want to know what do I think about the weather? This quarterly taped interview is a great forcing mechanism for me to think about things. Last quarter, I was bullish on a lot of things. For one of the first times, I started reading the comments in the YouTube video that you post. Always a mistake. Actually, it was really good because someone said, 'This guy's just an asset manager, of course he's just selling all the time and he's bullish on everything.' My first comeback to that is I have been bearish on things. I've been bearish on Bitcoin coming into the year, but I was bullish on a lot of things at the beginning of the second quarter. I'm still bullish on a lot of things. But I want to explain myself, and that's why I'll get to the slide deck if that makes sense.

All right. So the topics that I wanted to cover today are the equity markets and if you've seen semiconductors, you know who have doubled in the last 12 months or more, memory stock companies, the stocks of memory companies, excuse me, I mean, there's insanity going on in the equity market. So I do want to really, you know, Adam, you and I have never ever experienced the kind of appreciation that sectors of this market are providing and the related profit growth. So I want to walk through that because it's either you're unnerved or you have to at least explain it. That's job number one because equities are the biggest part of everyone's portfolios obviously. I do want to drill down on what I see as the risks to Anthropic, which is kind of one of the darlings and has been in the headlines almost every week. Then I'll do a revisit of some of the opportunities that I saw at the beginning of Q2 and revisit what I think about them today. And then a quick run-through of macro forces. You know, a long-term risk that I see is the government spending rates in the US, so you have to keep your eye on your risks as well as understand your opportunities. For those who haven't listened to our quarterly updates before, I don't have an opinion on everything. I just see hundreds of charts, thousands of charts. I pick my favorite factoids. I'm not going to talk about the Iran war; I don't feel like I have to go through the headlines. I just try to focus on questions that I think are important to ask about the future in the markets. That's the perspective. So, ready to start?

Okay. I would say probably not a lot, but let's start.

Um, so price to sales. I love multi-decade charts. This goes back to 1946. What you can see is today's market is more expensive by an order of magnitude than any other market over the last 60, 70, 80 years. Another chart that's extremely unnerving, not even a valuation chart, but this chart of the Korean stock market. 17 years basically of no performance whatsoever, and then it explodes upwards, driven by the memory stocks, SK Hynix and Samsung. It's just a rocket ship. That's why I said stocks are in orbit. This kind of price behavior is really distorting to markets and it's extreme. So you have to ask yourself that question. The reason I'm comfortable is because of profit growth. I love to look at profit growth reported last quarter and look forward. These are insane numbers for multi-trillion-dollar companies. Nvidia's profits going up 129%, Google's profits going up 80%, Meta 62. These are just insane numbers. Now, that's history. So let's look going forward.

Yeah, of course.

Placing a bet on the future. Whether that bet's going to play off, who knows? But obviously that goes straight to Nvidia's bottom line.

I think it's really a combination. To that point, Meta is now offering compute, or they said they were thinking about offering compute externally. It's interesting what I do is drill into the different business models of these companies. So I'll flip forward if you don't mind to answer your question. Right. So what I tried to do, ultimately, I'm bullish. Why am I bullish? Because Adam, demand for compute is still going up. We don't even know, but let's say five or six times a year, and supply is just not keeping up. Thank you. The question is at some point it will. Every time I talk to investors, they ask when do you think that'll happen? It doesn't seem like it's happening anytime soon. But let's say we don't know when it's going to happen. It seems a ways out. That's why I think you just have to stay fully invested. But when that happens, the question I ask is which of the companies have a moat? In 10 years, are they still with us? Basically whether they're 1.0 or a 2.0, are they going to be a 2.0 or get their lunch eaten by a 2.0? I love to oversimplify. To your point, I broke out the companies into vertically integrated, meaning they're customer-facing, they have compute, they have their own models, they have some chips. Alphabet, Google, Amazon, and SpaceX fall into that category, and they're hot, meaning their earnings are growing. As you saw, that was your question about Alphabet. The second category are potentially vulnerable because they might only have part of the tech stack. Like Intel and Cabras only do processors. The memory companies we're a little concerned about. They're very important, part of the bottleneck, more important than the Strait of Hormuz. But do they have a moat that will go away? I think they don't have a moat. Most of their profits, Adam, come because they jacked up prices. They're not even increased volumes that much. It's just that their memory chips are that much more valuable. That's why they're so profitable. I'm a little worried about them. The last one is the software companies. There's a fight right now. There are a couple of different business models. One is a single LLM model, like an OpenAI or Claude. Someone's trying to be the middleware, controlling your corporate AI environment. Then where AI is inside Microsoft or Apple, both backward-looking and forward-looking are in that 10 to 20% earnings growth rate, but they're relying on other people to provide the AI models and compute. They're just wrapping it. So that's how I categorize these companies. Looking backwards, the people with AI inside, Microsoft is in the 20% range, same as Apple. That's true going forward. Then the hotter, vertically integrated companies are doing really well, like the Amazons and Alphabet at 80% backward-looking earnings growth. Looking forward, I know there's a ton of data, but without going through all the numbers, if you look at implied earnings growth going forward, you see the blazing hot hardware shortage companies growing two to three times their earnings next year again, whereas Meta, Alphabet, Microsoft are in these lower profit growth categories. I don't know if that's helpful or not. I guess my main point is

I mean my main point is the implied earnings growth, the average earnings growth of these tech companies is 95% and the median is 40%. So these are just crazy profit growth. But this is the last slide on this. Look at tech profits relative to the rest of the market. They're just outstripping everything. The reason I think it's still sunny outside is because we still think these higher profit numbers are possible for the tech companies because of the continued shift in our entire computer infrastructure towards this AI-oriented software hardware combo.

I mean, I think so. Let's talk about Google for a second. I used to joke to our marketing department. It's not really a joke, but it's Google's world. We just live in it. Because all search was going through Google. They would determine whether we got web traffic or not. Google in the last 18 months, Adam, has completely transformed their business as an AI vendor. They're not selling blue links anymore, access to blue links. They are now a greater part of their ecosystem because they've taken all the knowledge on the web, processed it, and they are drawing you in to their ecosystem by giving you the answer from Gemini to most of your questions. Most people are not clicking through anymore. They're getting the answer through Gemini and that's it.

Look, we're not spending less money on Google. We still want to get placement through the old-fashioned way. Then there's a whole ecosystem of knowledge because they know the kind of customers that are coming to us. So we pay for analytics relating to that. Their business is so awesome because their revenue is going up while they don't have to increase their costs. AI is making their engineers more powerful. That's why they're growing earnings at 80%.

There's also, if you wanted to think of Q2, one of the things I would flag is that a lot of these corporations now have a venture arm that are contributing to profitability. So Google was one of the biggest shareholders in SpaceX. Nvidia has made a lot of venture investments in the ecosystem. So that is other income on their income statements. That's a whole separate webinar topic, but it's not insignificant. They're really making money throughout the ecosystem. Google also has Waymo. YouTube, the way most people experience what you and I are doing is through an ad platform or subscription. They have that vertical integration, dealing directly with corporate and individual consumers.

No, no, no. It's not right. And you know, we basically talked about the Mag 7 having the scale of customers. That's why I went back to this area. This is why I think this is so important. Because if you're interfacing directly with customers, you have that front-to-back. And if you're able to have the scale of inputs, it makes your product better. The more searches you do on Google, the better the results are. The more videos you post on YouTube, the same with content on Instagram for Meta. All these economies of scale benefit the bigger tech companies, right? And network effects.

It's completely mind-boggling. The maybe just flipping forward here, I found this chart to be helpful. This is from JP Morgan, looking at the top 10. The green line on the left shows the valuation. What's happening is the profit growth is so big. Another factor in the US equity markets is how these big tech companies have been driving the returns of the S&P, and that's why the market cap S&P has done so well over the last two years. But the profit growth has caught up, and now the valuations of the top 10 are almost the same as their average over this time period. The average is about 20.8 times forward earnings, and they're about 21.6 times. So there's not some kind of valuation distortion, Adam. That's why I think we can be really comfortable just riding this wave. On the right-hand side, even though it feels uncomfortable, the earnings of the top 10 have been increasing to support their market cap appreciation. Now, of course, they've come down a little bit in price, which has helped with their valuations, and that was a factor in Q2 relative to some of the blazing hot tech names. But that's kind of reassuring to me. Then the last slide, I like longer term slides. This is trailing 10-year returns of the S&P. I said, wow, equity investors have really done well over the last 10 years. How does that compare to history? We were talking about 1929 yesterday in the office. The trailing 10-year returns for the S&P through June is 15.5%. You can see that in blue, but it's not crazy high compared to prior equity bull markets. Those that have benefited from productivity from technology like AI have achieved those returns over a long time period. So if you will, the hump in the middle for the 1990s was a really good equity market for a long time.

Right. And go back to the previous slide for a second if you want. Because I mean, look in contrast to the dot bubble, where the market cap got way extended, rose way faster than the underlying earnings. Right. Right. And you're saying, hey, today it's actually different. They're moving in lockstep. The valuations as crazy as they might feel are supported because their earnings are growing at a pretty equally crazy rate. Yeah. And listen, we were right to be worried over the last couple of years because the valuations of these top 10 companies were elevated. They were well above 24 times forward, up to 34ish times. So it was something to worry about. But now it's flashing green. So Van Eck is still very bullish on the AI complex.

Absolutely. In prior quarters, we've talked about the AI 2.0 trade. You need the old world to supply the new world. I didn't include the price of copper here, but that's just one example. I think it's sustainable because this capex buildout is really tremendous in the US economy right now. Not all of those segments have worked out; some have appreciated a lot and taken a pause. We've talked about nuclear in the past because there was a bipartisan change in policy that's going to be supplying electricity. Some of the data center independent power producers' stocks have taken a little bit of a pause, but overall, one of the ways we implement this is through those 2.0 beneficiaries.

Yeah. Absolutely. It's a huge tech shift we haven't really experienced before, but it's driven by profit. When I talk to summer interns about how to value companies, we start with PE ratios because earnings is what really matters. Price to sales is a very subsidiary valuation technique. The fact that price to sales ratio has gone up so much is more of a reflection that technology companies are dominating this market. They're what's growing, the bulk of earnings growth. They're becoming more of market cap. So it would be natural for price to sales to go up and not worry too much. But it's something I had to start with.

Price to sales in today's world because technology companies just operate differently.

Yeah. No, no, I think it's so that's the last piece of the overall equity market before I get to the next section is there were some really big losers so far this year, right? And the dispersion within the stock market is as high as it is maybe every decade or so, right? So, there was a lot of mayhem and a lot of stocks bouncing all over the place, right? So anyway, I just wanted to make that point. And then related to that, I'm sorry this isn't as clear as it could be, but this takes momentum against quality. And we have continued to be in a momentum market, but what's interesting is that quality is a factor. So quality are companies with sort of more consistent earnings over time and other financial metrics. Quality got destroyed so far this year. And it's basically the story is the big some of the biggest components of quality indices were SA software companies and those software companies, those SAS software companies, are being disrupted by AI. So it's not to say that there aren't losers. My colleague Angus basically says all the time like you have to think about AI and whether your business is going to survive, right? You have to be AI forward because AI is coming to eat everybody's lunch. Can you recreate Van? Can you, you know, all that kind of stuff. So anyway, so that's it. That's the market. Crazy performance, unbelievable profit growth supporting it. And a lot of dispersion.