In this Left Brain Chartbus Update, host Brian Dress and CEO/CIO Nolan Langford discuss the recent market rotation that is broadening beyond the “Magnificent Seven” stocks. They note that small‑cap equities (especially sub‑$10 billion market‑cap names) and financial sector stocks have rallied after the Federal Reserve signaled that rate cuts may be near, providing a boost to net interest margins and reviving investor appetite for sectors that had lagged. The conversation moves through several themes: (1) the historical under‑performance of small caps and their recent breakout; (2) financial sector dynamics, including banks, fintech, REITs, mortgage insurers, homebuilders and retail, and why these are attractive now; (3) recent earnings from major banks and insurers, highlighting lower loan‑loss reserves, improving net interest margins, and strong investment‑banking activity; (4) a preview of upcoming Q2 earnings (GE, Alphabet, Chubb, Visa, ServiceNow, Amazon) with a focus on how AI expectations are shaping software valuations; (5) the pattern of market volatility around earnings, driven by quiet‑period betting and surprise results; and (6) a closing pitch for Left Brain’s income‑model portfolio that targets cash yields above 7% with tax‑qualified income. Throughout, the hosts maintain a conversational yet analytical tone, expressing cautious optimism about the rotation while urging viewers to consider the highlighted opportunities.
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Markets continue to show strength in 2024. Are you positioned to take advantage of the current rotation? We address that question and much more in this week's Chartbus Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.
Hey, Brian. Happy summer. Actually, midway through summer. Happy to be here talking stocks.
It flies by, Nolan. Quick preview for you. Small caps and financials have found strength since the latest Fed meeting. There are two topics for you, as we usually do. The first is the broadening of the rally, and the second is the preview of Q2 earnings. So we'll jump in quickly to a market recap. So S&P is up nicely over the last month, but we've had a major change recently. Small caps have taken a strong lead over the broader market over the last few days. Since the latest Fed meeting. Federal Reserve did seem to indicate that rate cuts are close on the horizon. I know we've been waiting for that for a number of months and maybe a year now. It's given a boost to financial stocks. We're going to talk about all that in topic 1. But Nolan, what are your opening thoughts, particularly as we weigh the best way to react to a changing market here?
I think it's good. We've been lamenting the fact all year that small caps have been treated like stepchildren. And probably unfairly so. So it's nice to see them getting some love this week. Financials getting some love, energy getting some love, real estate getting some love. Spread the love. It's good.
Not often we get to talk about love on here, Nolan, but here we are. We'll jump right into topic 1. So topic 1 is a broadening of the rally. So obviously this year we've had a really strong year. 2023 was strong. But there was a lot of consternation and criticism of the market based on the fact that it was just kind of a handful or a few stocks that were really driving a lot of returns. That's starting to change over the last week or two. The small-cap Russell 2000 will show you a chart here. Compare that to the broader market has made a major move higher in recent days, and that's after a period of chronic underperformance over the last 18 months and really longer than that, a number of years. Financials have also been kind of weak over the last few years, but they've gained some momentum in recent days. Nolan, just tell us this. What is your interpretation of the dramatic changes that we've seen in small caps and financials?
Oh, the go button has finally been hit by the Federal Reserve Board. You know, for the last 6, 7, 8, 9 months, you're saying at some point we're going to go, at some point we're going to go. We just haven't got the right data point. And last week they seemed to get the right data point to make them hit the go button. And I think since then, investors have been looking at the investment landscape different. You know, we always talk about this Magnificent Seven. We've spoken about the Magnificent Seven a lot over the last 12 months because it seems like those were the only stocks that were participating in the rally, and yet 7 to 10 stocks pulling the other 490 up. And this was a condition that we knew couldn't, couldn't continue, and other sectors were being left behind. So it's nice to see those sectors playing catch-up. The reason I say I think it's positive and bullish after the Fed hit the go button is I think investors have been hiding and those 7 to 10 quote unquote safe stocks too big to go down because they're part of the index. But investors were leaving capital uninvested in other areas. So the fact that people are kind of taking their head from under the pillow and buying other things other than the quote unquote safety trade, I think that's a good tale.
Are there any areas that you're particularly interested in, Nolan, with things kind of changing I know we don't like to get too into the macro, but with things kind of changing and giving us a green light on some other areas, where are you looking?
So two areas that have my attention, small caps, and this would be anything for the viewers. I would— the number has changed a lot over the years. I'm going to say anything below $10 billion. I am considering small cap and that's one of the areas I like. The other one is financials. You mentioned financials have been left behind. I know here we've spoken a lot about the financials we like and don't like. Historically, we have not done a lot in the banks, and the banks are rallying, and they're directly tied to economic conditions and also what's happening with interest rates. We'll probably still ignore the banks, but there's other areas of financials that do look interesting. You know, hey, with the interest rates coming off the boil, will home builders finally pick up? And how about retail? Now that you have rates that have crested, Will retail pick up again? So a couple of areas are interesting. Again, financials we'll be looking at. You do have REITs, you've got the mortgage area, you have the insurers. But what I really like in financials that have really been bludgeoned is fintech, financial technology companies. You get the benefits of being in the financial sector, but with the added margins of being a financial company. So financial technology companies are really on the shopping list. As well as companies that are sub-$10 billion in market cap.
Great, Nolan. And let's talk more about financials because we actually have gotten some results here. We're going to speak most about earnings this week in today's video. We did get some strong earnings out of some money center banks like Bank of America and then some investment type banks like Goldman Sachs and Morgan Stanley. Also coming out with some pretty good results for PNC Bank, a regional, and then Progressive, which is in the insurance business. And then on the other side of it, we saw Schwab had a pretty nasty reaction after their numbers. What are you seeing in financials? How are you reacting to it? And I know you like fintech. Any thoughts that are just coming out of what you see in the, in the financial earnings that have come out so far?
Yeah, two themes. I think with the money center banks, you know, we had Wells Fargo, we had Bank of America, and we had Citi. I think there is a sigh of relief from a few areas. One, you know, the commercial loan loss reserves weren't higher. A lot of people feared with this office meltdown and commercial real estate meltdown that it would impact the banks unfavorably. We've seen that last year in March with the rollover of the regional banks that failed. And I think there was a little consternation of how much of that bad debt that these big banks had on their balance sheet. Two, I think that there's hope, and I think that there's hope that the earnings will go up because of the net interest margin. Banks borrow short. And they lend long. And when the economy gets really, really weak, you know, they have to reserve more for potential credit losses. But when they can earn more for that spread, that certainly offsets their losses. And I think the final thing is, I think investors are hopeful that if we can avoid a nasty recession and have something that's a soft landing and people keep working and rates go down, that consumers and businesses will be in a much better position. That means that they can take out more loans, they could pay off their debt. Business lending may pick up, business formation may pick up. And all these things are really beneficial to money center banks. So I think that's what's driving them. But we've also had a rally in the investment banks, you know, Goldman Sachs being number one. And then Morgan Stanley reported and they also had strength in their investment banking division. I think this is really good investment banking. When Company A is getting bought by Company B, that's when Goldman and the big investment banks shine. That also means that the economy is probably pretty healthy. So I think the fact that the investment banks are up, you know, companies are doing not only mergers and acquisitions, debt refinancing, recapitalizations. So the banks are in play. I think all three of those areas really is what is moving the, the financials these days.
Excellent. And that's all good information. We're going to leave it right there. We're not going to spend 10 minutes on dissecting the yield curve, although we could. Let's move on to topic 2. So topic 2 is an earnings preview. We've said this many times, we love earnings season. It's our favorite time of year. We get 4 Super Bowls per year in the, in the investment world, which is nice. We've got a ton of earnings coming out next week. I'm just going to name a few for you, Nolan, in a lightning round. We've got GE, we've got Alphabet, which is the old Google, we've got Chubb, we've got Visa, ServiceNow, and Amazon. And then the week after, quite a few more too. Tell me, is there anything specific you're looking for? Are there companies that you're interested in reading their reports or themes that you're looking to, to learn more about?
You know, it's funny, Brian, we look forward to these 4 Super Bowls every year. It seems like every quarter right before we say the same phrase. This is the most important one. This quarterly earnings release is really, really important. And I say that because the market has placed its bets, and then you get the earnings reports to see if it was a smart bet or not. And so far, the market has placed its bets on AI, you know, AI to the moon. So we'll get to see in some of these earnings releases what's happening. Is AI still on track? Is it accelerating? Has it paused? That'll be something interesting. There's also going to be winners and losers from AI. That really has my interest. You know, we talked about, you know, technology has rallied, the Qs have rallied, but it's really been the semiconductors that have really taken the mantle. Software has really lagged, and there's a lot of software companies that are not only down this year, they're down double digits this year. And I think a lot of that is the AI contagion. People just You know, AI is sucking all the money out of the CIO's pockets. So I think software right now is kind of on the back burner, and investment— and investors have treated the shares that way. So during this earnings release, I'll be paying attention to software. What are going to be the reactions to these software releases? Because we know the revenue numbers are not going to be +30%, they're going to be something a lot more pedestrian. So how investors accept that I'll be paying attention to. And then the other thing is these software companies that know that they're in the crosshairs of AI. I think the reason that the multiples has come down is investors aren't sure if AI is friend or foe to software. In some cases, AI is being trained to be able to create its own software. I think investors fear that. So whatever these software executives say to defend themselves against that narrative, I think it's going to go a long way to determine the share price.
Definitely expect to hear almost every software CEO talking about their strategy with respect to AI, and we'll have to see who's got one that looks like it makes sense and who doesn't. Let's talk a little bit more generally, Nolan. So kind of understand what we're looking for from a specific point of view on themes and companies. There's this phenomenon you sort of touched on it over the last couple of years. Markets seem to look pretty ugly right before earnings, and then after we get earnings, tends to turn around pretty dramatically. Explosive. What's driving this pattern?
Computers, maybe algorithms doing all sort of crazy fast trading, meme stock traders, who knows. But you're right, it seems like every quarter you go into earnings season and you see these 10, 15, 20, sometimes 30% moves on stocks a day, and it's just incredible. And it's incredible to keep up with the releases and who's doing what and the tales from different sectors. But generally, the fireworks exist because people are positioned wrong. You know, companies say something in the earnings that surprised people. I forget how many years ago it was that, you know, the New York Stock Exchange and the regulators changed the rules, and so now there's a quiet period. Companies, a certain amount of days before earnings release, can't say a peep. They have to keep quiet. And so investors place their bets. But if these companies release something that's surprising to the market, you're going to see a reaction.
Absolutely. We've seen this a number of times, and some of the biggest winners in the market in the last couple of years have exhibited this pattern. We've had some pretty impressive earnings results and earnings surprises to the upside. We'll see what happens next quarter. I wouldn't be surprised to see a few again. We'll leave it right there, Nolan. Of course, if you've made it this far in the video, we'd like to ask you to like and share. It does help others find it. We're trying to grow our numbers and let other investors in on what we're doing here at Left Brain. I want to mention again, nearly 80% of the views on our most recent videos have been from non-subscribers. So if you're one of those 80%, hit that subscribe button, hit the bell for notifications. That way you can find out next time we're out with these videos. Nolan, any final thoughts as we close out for the week?
Cash, cash, cash. You know, a lot of investors are sitting on cash. A lot of you looking at this video are sitting on cash. Cash is doing okay, but we have an income model portfolio with an average yield above 7%. Most of that yield is qualified from a tax standpoint. So give us a call and let's talk yields.
Very good, Nolan. Hopefully we're going to enjoy the rest of the summer. And if you're interested in learning more about what we can do with cash that's sitting on the sideline, Get in touch. We'll see you again next time.
