Hey, this is Steve Eisman. Welcome to another episode of the Real Eisman Playbook. So, lots been going on in this world this year. It's been war, AI, private credit, private equity, you name it, it's happened this year already. The market's up nicely, but has been very, very volatile. And I have two guests today to help me sort of plow through all this stuff. Jason Trennert, who is the founder of Strategas, and Chris Verrone, who is the market strategist at Strategas. These guys don't cover a particular sector. They kind of cover the entire market. They have a nice overview. And we're going to talk about where things stand, and then afterwards I'll come back for some lessons learned.
Hi, it's Steve Eisman, and welcome to another episode of the Real Eisman Playbook. It's the beginning of August. This year has been — the only word I could say is tumultuous. So much has gone on. War, AI, private credit, private equity, situational awareness hedge fund blowing up. If I thought for another 10 seconds, I'm sure I could come up with another 15 things. So, I thought it'd be a great idea to kind of take a step back and talk it over with two old friends, Chris Verrone, market strategist of Strategas, and Jason Trennert, founder of Strategas. Guys, thank you for coming.
Great to be here, Steve. Thanks for having us.
So, like I said, boring year. Nothing much going on. But, Jason, let's start with you. Let's each take just a couple of minutes, try and put things in perspective, and then we'll try and dig deep.
Well, listen, I think it largely comes down to a couple of — as far as the markets are concerned, I think there's a gathering storm a bit, which is the war, tariffs, which people forgot about, but they're back. You have the war and the oil prices, then you have this debate over hyperscalers and whether they're spending too much or too little on CapEx. And so those are the things, and the Fed, of course, which is the other big — the Fed is really the big issue. So all those things together — in some ways it looks like it's hard for the market to make forward progress, but at the same token, what's driven the market so far this year — or just in the last — because Chris and I were talking about this on the way over here, the last 72 hours people are saying it's a boulevard of green lights for the hyperscalers now because it doesn't look like demand for AI is slowing anytime soon. I'm personally nervous because the market is so concentrated.
When you say the market is very concentrated, flesh that out just a little bit.
Yeah, so if you look at the top 10 — I'm getting the number slightly wrong — but if you look at the top 10 holdings of the S&P 500, I think that's 39%. If you look at the tech sector, I think it's 36%. If you add in tech-adjacent companies like Amazon, that are not specifically in the tech sector, you're up over 50%. Right? And then you see something like Situational Awareness, that happened with the VIX below 20 and a modest increase in interest rates, you know, a 15, 20 basis point increase in long-term interest rates, and you say, 'How can that happen?' But how can somebody lose that much money in what seems to be a very quiet market? That's the question.
I'm going to answer that, yeah, because I've actually written about this. I'll give you an example of something very extreme. Like imagine it's 1900 and you're very bullish on autos taking over the world. So, you buy every auto and auto parts company that's public and you short every buggy whip company that's public. Now, given what we know about history, obviously that trade is going to be correct. But if you're four times levered and let's imagine there's a bad auto accident. And all of a sudden people say, 'That's a terrible thing. Maybe this auto thing isn't going to work.' And so the problem is you're long X and you're short Y, but it's the same thing. And so if the trade reverses on you and you're four times levered, as South Park said in the classic Margaritaville episode, and it's gone. So, listen, and it's — I don't know, it reminds me of Long-Term Capital a bit, of course. And the names of these — but Don Rismiller was in our office saying, you know, the names of these famous hedge funds that have gone under, like Long-Term Capital, Situational Awareness, they're a little preachy. In terms of their name. Yeah, in terms of their — it's not like Iceman Capital Management. It's like, you know, 'I know better than you' management. And anyway, pride leadeth to fall, as I say.
Okay. Chris.
You know, when you think about whether it's Situational Awareness, a new Fed chair, maybe a new Fed regime — that's just over in the last week. Right, these are relatively new things. I go back and I look at kind of the course of the year. Every single opportunity where the leading stocks have corrected, right? We just had a 30, 40% decline in some of the leading stocks, whether it was the semis or the hyperscalers. Went down very meaningful, 30, 40, some 50%. In basically from mid-May, call it through last week. Money doesn't want to leave the asset class of equities. I mean, we're in this remarkably rotational tape right now, and I think it speaks to the idea that until we find what level of interest rate is truly competitive to equities, you're going to stay in this highly rotational tape. I go back to the prior S&P high on June 2nd. You only had about 50% of the S&P above the 200-day average on June 2nd. Today, we sit here with 75% of the S&P above the 200-day. So, even as the market has churned for the last 8 weeks, the internals have gotten better, not worse. Even as semis have corrected, the internals got better, not worse. So, this is a very rotational tape. I don't think we have yet to find the rate of interest that gets money to leave equities.
Do you have a guess as to what that is?
I think it's higher than most people think, would be my guess.
We thought it was 450. Because in 23, 24, 25, it was largely 450, right? That's why we chose 450. But now it seems higher.
And you kind of got corrective periods from when we hit 450 in the past, but I think if we're really going to end the cycle, it's a level much higher than people think. And I just go back to history on this. We've talked about it before. I mean, look at some of the great bubble-like environments, whether it was Japan in '89, JGB yields went four to eight that year as the Nikkei was melting up, or Nasdaq in '99, US 10s went four to seven that year. I don't think 10s are going to seven here, but with nominal at six and a half, maybe it's a level higher than people think. It's not 470.
Yeah. '87, right? Long rates went from six to nine percent while the stock market was up 30%. Right? And then it ended up, frankly, '87, I think it was up 3% or something for the year. Hard to believe it was up for the year. But that's the worst — I was saying this morning in our morning meeting, that's kind of the worst sign when stocks are going straight up and they don't care that at the same time long-term interest rates are going up, and the stock market seems impervious. That's the point at which you have the most risk. The fact that we're kind of dealing with this, I think speaks to Chris's point about the internal strength of the market.
And Steve, what you had just said, you know, go back to '99 or 2000. If I told you the leading stocks, Cisco or Sun Micro, were going to be down 40 or 50% over an 8-week period, what do you think the S&P or the Nasdaq would be down? A lot. The fact that we've been able to withstand that over the last 6, 7, 8 weeks, I think it's a pretty remarkable thing.
The economy is actually good. I mean, I think the PMIs show you that the economy is still expanding and actually pretty rapidly. And I think the one big beautiful bill — everyone's forgotten about it because there's been other missteps along the way — but it's a big incentive not just for hyperscalers. It's a big incentive for any company that's making capital investments in the United States. Because you get to write off the entire amount. And this may be what people have wrong about the Fed here, Jay, is there's this view that they have to tighten because of inflation. It may wind up being they have to tighten because of growth. And I think that's a very different message than second half '21 into '22. And I think you see it in the leadership, too.
The market — you're right. The backup in interest rates has largely been in real rates. It hasn't been in inflation, right? So, now, to me that argues for not tightening, even though I think the Fed will tighten.
Before you even talk about whether the Fed will tighten, we got a new man in charge. Everybody's writing about a new regime. Like, what is this new regime? What is that?
It's an old regime, frankly.
Okay, well, what is that?
So before people forget it, before 1994, there were no statements regarding monetary policy. No statements whatsoever. You had to infer it from open market operations from the Fed. There was no statement. Then in '94 they started a statement, and then only in 2019, seven years ago, did they start the press conferences after every meeting. So Warsh's view, which I agree with, is that it's been too big a free pass for the financial markets and capital to basically just take as much risk as they can.
Explain that to me. Why is a press conference and open communication giving people license to speculate?
Well, you're taking largely the risk out of it because there's a lot of discussion about the reaction function. And last week Warsh said the reaction function when you're at full employment is inflation. Like, what more information do you need? Because I think the press and financial market participants have gotten very used to being spoon-fed what the answer is going to be as far as the direction of interest rates and when. Now they're saying, like, listen, you're kind of on your own. You know, you guys have benefited greatly from near 0% interest rates for, you know, 15, 16 years. We're no longer going to do this. We're trying to make Fed monetary policy that fits the entire economy, not just what he believes, I believe, is very much skewed towards Wall Street and not skewed enough towards — and QE was much better for Wall Street and wealthy people than it was for the average person.
I would 100% agree with that.
I agree with that, too, because people forget the average person just has a savings account. I mean, you have people obviously that have private equity holdings and venture capital. For them, 0% money is phenomenal, right? But for the average — they just have a savings account — and then for a good part of the last 16 years they got zero.
Right. I wonder if the markets are starting to figure this out because if you look at 2026, it's been about the E, not the P/E. All right, so the PE is down maybe two or three turns from where it began the year. So, you've kind of entered this environment where it's much more earnings dependent, much more cyclical, which is a return to that kind of prior Fed regime. We've called it an alpha market, right? This is a market where I think stock picking and active management matters a lot more than passive. I think it's interesting, you know, we kind of glean our views from the tape that you're seeing all these asset managers start to break out here for the first time in years. And I mean, they've been on the wrong side of the passive trade for the better part of the last 15 years in this QE environment. So, I think there's some messages out there that speak to this alpha market.
Have PE stocks — I haven't looked at it recently — are traditional money management stocks outperforming PE stocks?
Yeah, you've seen everything from State Street to T. Rowe to Invesco. That's really been the leadership in the asset management space.
Yeah. I mean, and again, I think I can't think of an industry that benefited more from near zero percent interest rates than private equity. I know, I mean, it's just, you know, guys buying the Magna Carta and they're doing whatever they're doing, right? I mean, they have so much money they don't know what to do with it.
What's interesting is that in private equity, the monetization time frame is now like seven years. So, you know, if you're an institution and you've put all this money into private equity because you thought that it would look better because it would be less volatile because this — you know, you don't have to trade. It doesn't trade. So, of course there's less volatility. But people did this because they thought they could sleep better at night. So, now they're sleeping, but they ain't getting their money back.
They're not sleeping that well, right? Because especially colleges and universities went — I mean, Notre Dame, I believe, has 50% of its endowment in private equity and venture. 50. And again, they were geniuses — I'm a big Notre Dame fan, so they benefited from it tremendously. But on the way up. And now, especially if you build an infrastructure around, I don't know, a $10 billion endowment, and now you're not going to — it really is not very liquid. You have to tighten your belts a little bit. And I think a lot of colleges are finding that now.
Interesting. Let's move on to the war just for a little bit. Any thoughts on just the volatility given the back and forth, or what it means for the market? I mean, it just seems to me that, you know, on a good headline the market rallies like this week, and next week, you know, we're bombing again and the market goes down.
Yeah, I think people — I have no special insight here. Frankly, I was shocked at how quickly oil prices came down when you had this memorandum of understanding. Because a lot of the supply issues, in my opinion, from what I understand, are going to be there whether the war ends tomorrow or not. So, you're going to have a bid in the price of oil, which is the main issue. But I think, Steve, you're absolutely right. I don't know if there's any rhyme or reason to it, mainly because it's a tennis match, right? It's one day it's on, one day it's off. And how do you know? One of our clients said it takes two to tango. Like everyone was hoping that Trump could just give up or declare victory and move on. But the problem is the other side doesn't want to give up. So, unless we go away completely, it's not going to happen.
I think if you look at the parts of the world where it has mattered more, maybe in Europe, right? There's a lot more reflexivity to higher oil prices in Europe where they don't have this AI capex story underway. And you kind of compare that to what we've seen in the US, and the war or oil is just not the main event. It is still the CapEx spend. So, I think absent — or parts of the world absent where you have the real AI impulse, the war has mattered more, crude has mattered more, nat gas prices have mattered more. Doesn't seem to be kind of front page type stuff here. I would also note the last week and a half, two weeks, as oil kind of rallied back up as the shots started to get fired again and so on, the move in front-month crude was pretty tepid. We only recovered about 50 — 59 and kind of right back, here we are back under 80.
You know, I had a guest on who argued that there actually is an oversupply of oil. That China has completely withdrawn from purchasing oil and so that demand is much, much lower than people think. And then their other point was that these pipelines that are being built to obviate the Strait are almost all done.
Really? There's another data point that speaks to that. If you look at the metals market around the world, copper new high, zinc new high, tin new high, Chinese iron ore is collapsing right here. Right? So, if you want a demand story, I think the strength in the base metals that you would traditionally look to for China for some signal is not a China message here at all. It's AI and CapEx. China demand is very weak. Iron ore I think made 52-week lows this week. The Chinese market frankly has been very uninspiring over the last number of months. So, this seems to be a China demand problem, not an AI CapEx problem.
Let's talk to the topic that's like the topic, which is AI. Because I want to know what you guys think. So, there's AI, there's a software SaaS-pocalypse, and then we should also talk about what did we learn last week from Meta, Amazon, and Microsoft because that was very interesting last week.
So, two Fridays ago we put out a chart, and I thought I had a pretty anodyne sentence. The sentence was: it's going to be hard to continue to grow AI investments without further dilution of shareholders. Mainly because you saw Google issue $85 billion in equity, and all the hyperscalers are issuing debt now. Oracle was just downgraded. And to make a long story short, we got fired by a client.
You got fired? What do you mean you got fired?
He said, 'I don't want to read the work anymore.' At least he doesn't want to read my work anymore.
Your work? Maybe he wants to read Chris's work, but not yours. So the firm wasn't fired, you were fired.
Yeah, I was fired. And I thought, you know, I never found the table on anything. But the guy was long AI, clearly, and I suggested that it might not work out or that you might have further need for debt and equity capital to do it. So I am worried about the cash flow. I mean, there is a big bet really on whether the cash flow is going to come through, and the cash flow of the hyperscalers over the next couple of years looks like it's going to be negative.
Well, just to give some statistics. So Meta's cash flow for the quarter was $785 million. Microsoft's, which was the best of anybody, was about $19 billion, but it was down around 25% versus last year. And Amazon was negative for the 12 months.
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One thing that is not arguable is that the business has become incredibly capital intensive. That's unarguable.
It is. And I talked to one of my clients this morning. He's like, 'I've never heard a more bullish conference call in my life than Amazon last night.' And it sounds like they're going to spend way more on capital and they're going to need to spend a lot more on capital spending, all the rest of it. And it's true, but I don't see how you do it without hitting the bond and equity markets, right? I mean, it's not going to come out of cash flow. I don't think.
I mean, the fact that Google raised $85 billion in equity is shocking given the fact that the last time they actually raised equity capital was in the early 2000s. Right.
Yeah. So, to me, I'm a little — you know, I wouldn't short it. We're market-weight technology, and I do think the demand is exceeding the supply for artificial intelligence. Whether they can provide an appropriate return for the shareholders of the hyperscalers, I'm not so sure. I'm actually a little more bullish, believe it or not, on the semiconductors in a way because I do think the hyperscalers are going to continue to spend money, but I think it could be a little bit of a race to the bottom, at least for some of them.
I think what's interesting is this rotational market we speak of is rotational at the sector level as well, and it's so sentiment driven. I mean, the attitudes towards some of the hyperscalers kind of reached a fever pitch of negativity maybe two or three weeks ago, and — when Oracle got to like 120. And you kind of think about this a little bit. I think what people are struggling with here is for so many years, you viewed these as these cash flow machines. The cash flow monsters. And now I think what the analyst community or the PMs or the investors have been searching for is like the —
The right way to analyze them today, because it's different. And I think that's been mistaken for some deterioration in AI fundamentals when it's just that we have to think about them a little bit differently. You know, you look at some of these moves. You know, Google's basically back at the highs here. Amazon just made new highs. The five-day change in Microsoft is the best we've seen since the IPO in '87.
There's a momentum to these the last two or three weeks where at a minimum I think they're tradeable.
Whether or not they kind of reclaim the baton of leadership over the longer term I think is to be seen, but the sentiment got super negative on these.
What— give me your thoughts before we get to Meta.
So I I just want to give you guys a statistic just to think about because I think you could argue the hyperscalers have a real business and they're real moats around it, but it's a lot more capital intensive. The Anthropics or OpenAIs of the world, that's where it's most questionable. I mean, they're totally negative cash flow.
You know, the Chinese are competing with them and I read this report by a firm where they basically said that something like 70% of AI hyperscaler revenue is from just those two companies. So if this is the big if, if OpenAI and Anthropic ever get in trouble, the ecosystem is in trouble. That's what I think.
No, I— I think it's undeniable.
I don't know if that's going to happen, but I think that's undeniable.
Hey, I think it's undeniable, right? Because you you you have at most the— I think the hyperscaler index, UBS has one. It's five companies, right? And so, and you again, you can name them off the top of your head. It's an index. It's five stocks.
It's probably taking in a lot of money and all the rest of it. But, um, I don't know. This is everything right now is a big bet on productivity. The AI— the one big beautiful bill is really a bet on productivity to bail you out of inflation. And all of this CapEx spending is a bet on productivity that companies will continue to spend hand over fist to get an edge.
You know, Steve, I think it's interesting after deep corrections in what I would call AI-adjacent or build-out type names, Quanta, Emcore. I mean, these are probably down 30% from the highs. Caterpillar had a pretty big quarter. They've all responded over the last couple weeks.
I mean, Quanta was up like 15% on earnings day last week. It was amazing.
So, I think you kind of have to give these the benefit of the doubt until they, you know, attempt to rally, don't make new highs, and fail. And we haven't seen that yet.
So, let's look at one that maybe you don't have to give the benefit of the doubt to, Meta. What was your impression of the quarter?
I don't have a strong— I don't have a strong view. The only thing I'm reminded about is, um, in late 2022, it was the stock that got Zuckerberg to change course. Um, right, it was the stock down probably 50, 60%. In late 2022, early 2023, I think it bottomed.
With the Metaverse spending.
I think the stock bottomed at maybe 90 bucks.
