Balancing Earnings Surprise "Shock" with Risk Tolerance in "Casino-Like" Moves

Liz Ann Sonders notes that earnings appreciation has outpaced price gains, supporting the bull market, but warns of concentration risk in AI-related CapEx. She sees a potential broadening catalyst in geopolitical developments and advises risk management given speculative, parabolic moves in tech. On the Fed, she expects gradual telegraphing of any changes to forward guidance or the dot plot.

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Balancing Earnings Surprise "Shock" with Risk Tolerance in "Casino-Like" Moves

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Sonders says momentum in earnings appreciation is on the side of the bulls, but warns of concentration risk, speculative parabolic moves, and the need for risk management. This suggests a cautious near-term upward view.

Sam

Strong earnings continue to be the primary driver and support for the market, providing a positive earnings shock. Asks how much more needs to be priced in.
Liz Ann Sonders

Price appreciation has undershot forward earnings estimate appreciation, so multiples have been trending slightly lower. The concentration issue, particularly AI-centric hyperscalers, is a risk factor as CapEx share runs hotter than net income share. Momentum in spend and earnings appreciation is on the side of the bulls.
Sam

The Nasdaq 100 14-day RSI is near 80, an extreme level, but no one seems to care. Asks what catalyst could cause meaningful broadening out.
Liz Ann Sonders

Ending the war could be an important catalyst for broadening, allowing a disconnection between oil prices and bond yields. Peak breadth improvement occurred before the war, with over 60% of S&P 500 constituents outperforming the index year-to-date. A miss by a key AI company could throw cold water on enthusiasm, but that is not her base case.
Sam

Asks if extreme moves in tech names like Micron are just AI hype/tech mania, referencing a 'casino-like feel' in the market with short-term money sloshing around.
Liz Ann Sonders

It's both fundamental support from earnings and speculative, short-attention-span money driving parabolic moves. Risk management strategies, including rebalancing at the individual stock level, are paramount.
Sam

Asks about Kevin Warsh potentially revamping Fed guidance, dropping the dot plot, and removing easing/tightening bias language. Asks how the market would react.
Liz Ann Sonders

The first step is likely dropping forward-looking language suggesting an easing bias. Any changes to the dot plot or press conference periodicity would likely be telegraphed first, possibly at the next meeting.

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