Here to discuss all that is adam parker, Research Founder and ceo, and a cnbc contributor. Adam, there were all kinds of reasons it made sense to anticipate a little bit of chop coming into august seasonals, sentiment, technicals, valuation, arguably, yields are doing what theyre doing, but Corporate America has kind of shown its hand on earnings for the most part this earnings season. Better than anticipated. The consensus is holding up on a forward basis. Where does that leave you in terms of whether, in fact, you know, the market can skate without much more of a correction i mean, if youre reacting week over week or, say, over the last month, i dont think the data make you more negative. No. I think if you were starting july 1, saying, im 50 , were up ten, down ten, im like 60 40 up now because i think the Big Companies delivered pretty Solid Earnings reports their earnings are up pretty much for all of them, google, amazon, meta nvidias numbers are up. They didnt even report yet. So, i dont think, in that broadening debate that i get in every meeting, i dont think you have data that supports selling the big one yet. So, i think the lowend consumer is holding in. I think the dream that 24 could be good is starting to grow. On the margin, i think the data are slightly more optimistic i mean, apple, thats a little bit of a breakdown that would get your attention if you were just staring at the chart and said, oh, we raised above 3 trillion market cap and then you get a mostly as expected Earnings Report and youre down 10 . Microsoft trading pretty heavy since its result i guess the question isnt, can these Big Companies deliver on their promise of being resilient and having good Profit Margins that are defensible, but is the market kind of saying, you know, weve been here for a while, and we priced it in. I think the market was anticipatory, but in order for the rally to broaden, you either have to believe that the other companies are going to have better relative earnings revisions, upside to their margins and earnings at a better trajectory, or that their multiple is going to expand relative it is true that capweighted universe is expensive versus equal weight about the highest since the unwind of the tech bubble 20 years ago, so you have valuation support for the broadening, but usually, you need the catalyst of the relative margins and earnings to be better. I didnt get that in this earnings season yet. Well see if thats whats coming if you do get lower commodities, you get less wage pressure, then that would be the bull case for Margin Expansion and the broadening it seems like you now have most people content in saying that recession watch has been called off for now beyond that, i wonder what people are expecting in terms of whether were going to be in this late cycle, muddlethrough environment. Stocks are expensive, but the feds almost done, and theres always kind of an offsetting factors that seem like you could argue either side. You get more, you know, Equity Investors get increasingly anticipatory. I remember, you know, a hundred years ago, when i covered intel, they raised capex. The stock went up because people thought, oh, demand must be good, theyre building a facility then the next cycle, they raised capex, stock gets creamed because everybody saw what happened this cycle, everyones been increasingly anticipatory. The fed is not dovish, but everyone knows were toward the end of the cycle, one more, two more, so youve seen the relationship between fed fund futures or the perception about rates and multiples priced to earnings, and nobody cares the multiple has gone up in both cases. Theres no doubt people are anticipating the end of the cycle, so i think to me, whats interesting is to get the 5,000, so lets call it 10 , a little bit more upside, and now its required to say, im going to walk in and be bullish on equities, incrementally. You got to pay over 20 times the consensus 2024 earnings for the s p. The market doesnt usually stay at levels that high. So, the only way thats right is either theres upside to earnings next year, or hey, it is the beginning of a new cycle, and earnings are going to grow, lets say, five more years in a row. Or as far as the eye can see again. Sort of like 2012 to 19 if thats the case, equities are going to look forward. It overshoots and then backs off. Right or we get a pullback when i talk to investors, i think the bull case probability is growing in their minds. You dress the market up, usually, in an Election Year i think people think there could be incremental stimulus from china. Theres a lot of incentive to you know, on decarbonization, on industrialization, on automation the lowend consumers come off and are hanging in there this could be a thing that the higher its a more plausible left unicorns and lollipops thing than it was. Lets bring in kristen bitterly into the conversation so, kristen, you can definitely build the rationale for why the market is here now that the market is up close to 20 , s p 500, up 30 off the low, which after a nonrecession bear market is about what you get in the first year. So, do you think that rationale has substance to it, or are we just kind of telling ourselves that this makes sense . I think once you break down whats actually been happening with earnings over the past couple of quarters, it tells a very different story, and this is something thats becoming more frequently discussed. The concept of a rolling recession. So, not an economics recession, but process recession, and so if we look back to q4 of last year, we had 7 out of 11 sectors already in a process recession same thing with q1, and now q2, youre looking at about 6 out of 11 sectors in process recession, so when were trying to explain the Overall Index level and trying to explain the appreciation in the s p 500, and that concentration, it starts to make sense, right . A lot of the activity is driven by the profitable positive Free Cash Flow generating companies, and so the question really becomes, does that have breadth to it, and is it going to expand given the outlook for rates and the economic data. And i mean, the market itself has, without a doubt, broadened out. I mean, by the time the complaint about its only seven stocks going up got into its fourth week, i think that whole theme maxed out, and then we have been broadening ever since. I think the question is, earnings trough, maybe, you can check off that box Second Quarter looks like the worst, perhaps it does look like the end of 2023, for sure mathematical certainty. Yeah. Disinflation has been pretty persistent since october i guess the question now, this week, with cpi coming, are we going to have a rethink on that . Is that what the bond market has been hinting at, that, in fact, Inflation Expectations are going to be a little more stubborn i think at the end of the day you almost have to say how should an investor be positioned in coming into all of this one of the biggest mistakes that you could have made at the beginning of the year is making that decision between being either all in or all out, and even if you were someone hiding out on the sidelines in cash, your yeartodate performance is probably just slightly north of 2 , whereas if you had stuck with a diversified portfolio, 60 40, that had one of the worst performances last year in history, now its up around doubledigits yeartodate. And so, i think its really boils down to, from an investor positioning standpoint, this idea of diversification, that there are really attractive opportunities in terms of not only kind of the short end of the curve from a fixed income standpoint, but also extending duration and locking in some of these yields, and then from equities, stay diversified so, i know that sounds really simple, but as you look at the Different Things that could play out going into yearend, actually be balance and had diversified, and youll benefit from some of these things. The idea of going longer term in fixed income and locking in positive real yields at these levels, i think thats maybe youre finding this with clients, that you have a little bit of a job to do, persuading people of that, just because the cosmetic nominal yields at the short end look too interesting at this point. Equity guys always hate that too. Its long enough, we dream things will get better, and then we can beat the guaranteed deal. I think you have to look at the collective yield of your portfolio, though, so its undeniable that on the short end of the curve, whether its three months, six months, those are really attractive yields, but you have now, all of a sudden, with some of the dialogue, you have real reinvestment risk, so if that is if thats your cash holding, thats fine. But if this is part of a diversified income strategy or fixed income strategy, thats where you can see locking in even fiveyear yields at these levels is compelling or doing a barbell approach and adding diversification and highquality fixed income assets. Adam, when you say that the very largest highquality stock havent given you a reason to step back from them, does that mean you would want to overemphasize them or is there stuff happening elsewhere in the index thats interest something. Definitely interesting elsewhere. I view the biggest names as Risk Management stocks anyway if youre trying to beat the s p 500, im talking about just on the equity part, you know, you really dont know anything about those companies thats not in the price. Theres 60 sellside analysts and, lets say, 4 million buyside Analysts Covering those names. How could you possibly know . Hug that 30 bench width of those big guys are and try to get your performance elsewhere i think in reality, almost everyone i know thats an active manager was underweight that big group, because its hard to charge 1. 5 in 17 and then just own microsoft. So, you got to go down and whats happened is youre going down in an area where returns have been worse and its harder to make up the excess returns, so i think people want the broadening to happen, but most people i know were not overweight that group. To me, its Risk Management, not alpha. The other 77 of the market, theres a lot of things going on i think my highest conviction view in any six 12month view is to own energy. I think youre starting to see that market act better the stocks are cheap i would want people to be as overweight as they could be energy in their portfolio. I think my second highest conviction thing is underweight retail i think any physical box that sells items has so many headwinds. I think you saw some of the transcript work we did where whether its stealing, which they call shrinking but i prefer to call stealing, or growth in the stores or their financing arms, theres a lot of negative trends there so, i like sort of long energy, short retail as between now and yearend kristen, you talk about the rolling recession concept or earnings downturns that are kind of not necessarily all lined up at once. Which makes sense. Its the way the economy, i guess, behaves most of the time is that things wax and wane. But its a reminder, maybe, that o o outright recessions tend to come when theres multiple things at once do we have the preconditions for that lining up i know that that jobs number on friday seemed kind of picture perfect in terms of goldilocks and, you know, right in the middle of what people might be worried about, but you hear the persistent recession callers saying, yeah, it always looks that way six months before jobs go to zero on a monthly basis. I think you have to look at some of the risks to that, which would obviously be massive deterioration in the employment backdrop would also be just inflation being stickier and maybe this print that we get this week is a little bit of a head fake in terms of some of the base effect that were anticipating and some of the things we already know. And i think, like, the thing that, at least for us at citi, that makes the most sense is this concept of its a flowing growth environment and so, its not necessarily that because you have to remember, companies and consumers came into this year very, very well positioned from a Balance Sheet standpoint, and what would ultimately derail that, and it goes back to those risks that i mentioned, so the slowing growth, and you can see it even in q2 earnings, when you look at the earnings beats that you could argue are off a relatively low threshold, when you actually look at that from a Topline Revenue, its very different, that story. So, a lot of the profitability beats are based on inflation coming down or based on cost discipline and expense t discipline that Topline Revenue is starting to get shaky in some areas theres always a tension between the economy and stocks and i always the economists sometimes to me are looking at a different planet to me, stocks go up when margins go up. And so thats been a playbook for 20 years with semiconductors i think thats a huge point. If the input costs come down and companies can have higher margins than 24 and 23, you dont want to be that on equities i think its that simple the other poisont, if you lo at the credit markets, it seems as if Financial Conditions are loose enough to allow things to continue in this way on the other hand, are credit markets giving us a useful signal of forwardlooking strength ive been confused about how Financial Conditions are looser now than they were at the beginning of the year when we had Silicon Valley bank in between. If you talk to folks that are trying to get nonconstruction loan from a regional bank, they cant get one. Commercial real estate i think boots on the ground, its a little bit more difficult than the, you know, actual stated data look. So, im not sure the im not sure i could say, oh, i think loan growth will be better Going Forward than it was pre its a little bit of a tension between how that datas measured and the reality. The s p going to 20 times earnings and the vicks going to 12, loosening Financial Conditions those are part of the calculation of Financial Conditions for the two major, you know, Financial Condition index that people look at. Right is the market itself and the vicks. But the reality of, like, getting a loan, i think, is more challenging. And i think thats something when were talking about the health of the consumer and where we would see cracks in that, the first market to widen out is going to be credit spreads and right now, you see really tight spreads, except for some minor exceptions which are all in areas that we know very well, whether thats commercial real estate, office space, some of the areas we know are going to be stressed Going Forward, so i think thats one of the metrics to watch very very closely if there are any cracks when it comes to the health of the consumer the monthly data the banks put out is useful. 90day credit card delinquencies, they ticked up a tiny bit, but theyre still super low. The lowend consumer can get a job and feels pretty good. Gas is down at the pump. Their real income is up and theyre still able to do okay. I think you need the employment market to get way worse or inflation to pick back up again and theyre worried about the weektoweek bills short of that, i think the long consumers okay. When the big macro worries are wage growth is above 4 , and almost everybody with a mortgage has the rate below 4 and thats why the regional banks are in trouble gas is down a dollar at the pump thats what people kind of do weektoweek on the way back up. But year over year. Kristen, in terms of the whole staying diversified story, does it encompass globally one of the things weve been doing over the past couple of weeks is adding International Exposure and small and mid cap exposure when you look at the average investor, theres very minimal exposure, period, within those two areas so i think the small and mid cap argument, a lot of people are aware of that in terms of trading at about 30 discount and then when you look at international, International Trading at about a 40 discount to u. S. Equities, or another way to look at is u. S. Equities currently comprise act 60 of market capitalization but only 50 of profitability ill add two more arguments, though, for international. One, the currency one. If youre a u. S. Based investor, you have the equity appreciation as well as the dollar play there, and then the second part is when we think of this is something thats a lot easier for investors to do in this type of market. When you think of longterm trends t ones that dominated the past ten years, smartphones,social media, are not the same ones that are going to dominate Going Forward, and thats much more of an international play in longevity, the rise of the middle class and broader asia, and having some of that International Exposure, you can clearly benefit. I think if we sat here long you enough, we would agree on 80 . I spent most of my career not liking international and you know, ive always thought, europes the valuation thing is always there. The valuation thing is always there. Every cool thing that happens, like a. I. , is the u. S. You know theyre always cheaper for a reason im torn on that i think sentiment, when im out there talking, is the most for japan or you like energy, adam, the european ones are cheaper. Ive wanted that trueup between gdp and Capital Markets and that trueup between valuations and rates to happen, and its lured me in the past, but ive been burned by waiting for that i know what you mean. It hasnt felt like youve been penalized. You havent been penalized for being parochial. When you look at expansion into a region like asia, china was the biggest topic, and really dominated a lot of the investing conversations. Obviously, japan now, much more front and center, given whats happened there but i also t