Replay: Macro Perspectives from William Blair’s 46th Annual Growth Stock Conference

Richard de Chazal

Good morning. Thank you all very much for, coming this morning. 7:15, bright and early. I think William Blair, as our head of research, knows where we only we know we only have you for two and a half days. So I think we want to maximize the, the time we spend with you.

00:20

So, very much appreciate you, all being here so, so early. A lot to get through. So, we'll sort of plow on. I think today I'd like to talk a little bit, I guess, about the oil shock. That is a shock or not? About a little bit about the consumer. A little bit about CapEx.

00:42

And then, we can talk about, equities and bonds, and, and go from there, as, as usual. Also, just in case we run out of time, the, the breakout session will be today at, RPM at, 5:30. So hope to see you all. Hope to see you all there. So, just briefly, in terms of the, the the oil shock, I think the, the IEA are saying that, this is the worst oil shock in world history.

01:16

I think doesn't quite feel that way. Certainly for us in, in Europe or in the U.S., I think we're seeing, you know, definitely seeing higher gas prices at the pump, but it doesn't feel like we've seen, too much demand destruction just yet. If you look at this chart here, I think it shows the, rate of change.

01:41

Remember, it's not so much about the level. It's about the rate of change. And what we've seen is the rate of change, is is certainly very high. It has actually been higher at other points in time where you haven't had, a recession. So I think the message is, as I've written here, is, is not all oil spikes, have caused recessions, but most recessions have been associated with, oil price spikes.

02:09

And I think a lot depends on your starting point. Is your economy quite brittle or fragile going into this? And I think at the moment, actually the, the economy is, reasonably stable, resilient, if you will. I think at the moment we're still in this period where inventories are being run down. Listening to a couple of the energy companies yesterday, they were saying that those, they're getting closer to tank bottoms.

02:44

But while that process has still been going on, we've been somewhat insulated from, from the demand destruction aspect of this. We've also had new supply coming online a bit in the U.S., old pipelines being, you know, used across, Saudi Arabia and the UAE. So there's been sort of a fudge through at the moment.

03:09

I definitely think, you know, the longer this goes on, the longer the street remains closed. That sort of cozy ish scenario, little demand destruction does start to shift more towards more demand destruction. I think the other thing too, is that, you know, whilst maybe we haven't seen so much of that in, in Europe or the U.S., other parts of the world have definitely seen, some demand destruction, particularly those most, which get most of their energy via the Strait of Hormuz.

03:45

So Southeast Asia, India, South Korea, Japan, these countries have definitely experienced, some demand destruction, which has actually helped, us in the, in the U.S. I think the other thing is, we're also in the midst of a full on AI boom. So that certainly helps to power us through, any, any, oil related weakness there.

04:14

This slide, I think is helpful too, although if you talk to most energy experts, they would probably say this is this is just the dumbest slide in, in economics, because, energy is in everything. So, you know, it's not overly meaningful, I think. I think it is, meaningful because I think what and at the very least, what it does is it says that, you know, consumers are spending less directly on energy these days.

04:43

They're more energy efficient. So there's more sort of cushion between energy prices, i.e through companies and corporate profit margins before it hits the consumer itself. So I think and actually I heard a company yesterday, saying just that, that they're sort of underpricing on inflation, because they, they don't want to risk long term gains for sort of short-term gain, if you will.

05:12

So I think, I think there's, there's definitely a bit of that. So I don't think it's quite as dumb as, some of these experts are, are suggesting, and then briefly on the consumer again, as I say, I don't think the consumer has been that brittle. If you look at, in aggregate, consumer balance sheets, they're actually in excellent shape.

05:34

So this is, debt to net worth find net worth is is very high. But we're nowhere near where we were in in the mid 2000s. You know, we're now the lowest debt to net worth ratio since since 1963. If we look at, debt to income, what we've seen is, is further continued deleveraging since the global financial crisis, where income has been growing faster than debt.

06:05

So that debt-to-income ratio has continued to come down. And that's also extremely low. And despite what we saw recently, and think of some of the data last week, a, a much lower personal savings rate, the actual aggregate level of savings through through cash or liquid assets for the consumer, through cash and through money market funds is actually extremely high.

06:35

So cash, as a share of total financial assets is, is now the highest since the late 1960s. Money market funds, holdings there. If you exclude those spikes, during recessions is actually the highest on on record as well. So my point is, is that I think there is, some, cushion there for, for consumers, as well.

07:04

So that's, helpful. So where are we seeing the pain? And I like this slide because I think it, it highlights perfectly what we're seeing. And this is the, Conference Board's data of consumer confidence versus the University of Michigan's survey on consumer sentiment. And what we've seen is the Michigan survey has dropped to its lowest reading on record, on record.

07:32

So that's that's below what we've seen during the global financial crisis, below what we've seen during Covid, during the 1990 recession. All of that stuff. So it's hard to believe that. Again, feels like that's the situation for, the U.S. consumer at the moment. But what I think is at or if you look at then the, the, conference Board survey, that's only just a little bit below the historical average.

08:18

And I think what the difference is between the two is that the the Michigan survey is more sensitive to inflation. There's a lot of buying plan type questions in the Michigan survey, whereas the Conference Board survey is more geared towards the labor market. So how do you feel about, jobs going forward, about pay and, you know, consumers feel all right?

08:23

I mean, the labor market unemployment rate is 4.3%. It's quite low. But I think what it shows is that consumers, again, which we learned, during Covid, is they really, really hate inflation. And I think what they're seeing once again, is inflation moving up. It's turned real income growth negative again. So again is starting to to crimp on their, spending power.

08:57

And I think what we're seeing still is they still got a job. So they kind of feel okay. But some of their spending power is is being crimped. I think that's starting to impact discretionary spending. But, you know, still feel okay ish. And I think so that's sort of the near-term. This is sort of a big bigger picture macro slide.

09:24

And I like it a lot because it's just so simple. It's just, personal consumption as a share of GDP. And I think what it shows too, is that since the 1960s, right up until the global financial crisis, what we had was consumer spending rising faster than GDP over that whole period. And I think with with all of these sort of big picture things, it's it's it's largely driven by demographics where we had, baby boomers coming out in the 1960s.

09:59

Then we had women in the workforce, then we had a ton of ton of, immigration. And then we sort of capped off that, that rise with an almighty credit bubble for, for us consumers. And I think at the moment now that's starting to come down, the reality is, is how much, how much more of GDP can the consumer absorb or take, you know, when they're they're already 68, 70% of GDP, it's not going to go to 100.

10:28

Clearly that was sort of the, the peak. And I think what we're seeing now is, demographics kicking in where, we have aging, baby boomers moving out of the labor market. We've had a, less immigration. So I think that all builds into, you know, why we're seeing, again, slower personal consumption. You know, you have you have less consumers, spending and we have a much tighter labor market.

11:24

So this is this is the other thing which I think helps support, the consumer this time around is that the pool of available labor today is not what it was. So back in that sort of yellow section, really from, you know, 1990s up until just before Covid, say, 2017, 2018, the pool of available labor for for companies was very deep, very wide.

11:29

Companies could really hire and fire at will. And when I think it came to a choice between choosing labor or capital, companies were very happy to choose labor. It was cheap, plentiful, flexible. You could, you could, you know, hire and fire, as they say at will. But now what I think we're seeing because of those demographic shifts and increasingly because of the, the immigration, we're seeing this much tighter labor market.

12:07

And I think what that means is companies now have to shift from from labor to capital. So I think in that sort of old world of the last 20 odd years, we didn't have much CapEx spending because companies didn't need to we didn't have high productivity. Productivity was this sort of puzzle. It sucked. Basically for for two decades.

12:25

And why? Because you didn't need it. You had cheap, flexible labor so you didn't have to spend on automation. And I think today with, you know, we hearing from companies all the time, they just can't find the workers. So they do need to spend increasingly on automation to, to help to offset that. And here I think this slide just shows that as well.

12:48

And it's, population growth, from 1900 to today, the that's an estimate obviously for, for 2026. But we could have this year for the first time since 1918, negative population growth in the U.S. So that's nuts. You know, that's that's the first time since the Spanish flu. So I think that's a very significant change.

13:15

And again, sort of big picture, it's unsurprising that maybe consumer spending when you don't have the population growing there, is is going to be a little bit more, subdued, than, than what it was. So I think what what we're in is a is a CapEx boom. I think, you know, that's all of the, the, the sort of, it's a large part I at the moment, but I think there needs to be a CapEx boom across other parts, of the economy.

13:50

And I think, again, that's for several reasons. One, because the labor is not there, but too, as as this chart shows, which is the average age of the capital stock, because companies were choosing labor over capital, they weren't investing in that capital. So the age of that stock just kept getting older and older and older. And now I think they've reached that point where they actually do need to start, reinvesting once again.

14:19

So I think that's, a clear boost. Why now? I mean, I don't know, anecdotally, and I don't have any hard evidence on this, but, you know, I think maybe companies were sort of saying, well, you know, old Bill's going to retire soon. So let's not, you know, renew that piece of equipment that, you know, he could give a shove or a kick to and get it going.

14:43

You know, let's just wait till he retires and then we'll sort of start to renew that, that capital stock once again. So possibly, that's, part of the picture. But I think we're definitely starting to see more companies, investing. I think there's also some FOMO. So you see your competitors starting to invest. You need to, upgrade your equipment, as well.

15:06

We have a whole innovation boom going on. So again, companies need to, to invest to remain relevant, in the, in the industries that they're in. And as the sort of quote from Eaton Corp, which I included here is we're in the midst of a massive power boom, too. So this sort of AI future that everyone's kind of envisioning, we're not going to get there with the capacity that the economy has today, which is sort of down here relative to up here and Eaton Corp saying that, you know, data centers today have 40GW of, of of power, and they need 160 to 200 by 20, 30.

15:55

That's nuts too. That's that's a lot of power. And as I say, if you don't speak gigawatt, which I don't, but I did look it up. And how much does one nuclear power plant produce? How many gigawatts? It's it's one. Right. So you would need basically 150 new nuclear power plants, in the U.S. to meet that demand, out there.

16:21

So it's very much sort of, we're going to need a bigger boat. And so I think that's, that's another thing. And then the last thing I think is, is that the government is heavily incentivizing, companies to do that. So they want to reassure they have, big national security priorities. So we're seeing that, through the Chips act, the I.R.A. one big, beautiful bill.

16:50

I heard an energy company yesterday. I don't know if you if you heard, but they were certainly, talking about the a lot of, incentives the government, was providing for them and including, just outright investment. So I think that's that's, quite a significant driver as well. The other thing, unfortunately, is that I think the inflation regime has changed.

17:17

So I think none of this is particularly disinflationary. I think what we've gone from, from about 2000 until the start of Covid is we've moved from a disinflationary deflationary economic regime to more of an inflationary one. And I think in that old world there was really no upside risks to inflation. Right? We were in a world that was essentially frictionless in the sense of capital and labor.

17:55

So if a company again wanted labor, labor was was cheap, it was plentiful, and you could get it very easily. And if you wanted capital, you know, companies were running lean. They were running just in time. We had hyper globalization. So anything you wanted, you could have in your warehouse overnight. So, you know, if you would go and visit companies, they would proudly show you, you know, pretty much an empty warehouse and say, look, you know, whatever we need, we get it overnight so we don't have to hold anything.

18:28

So I think that was the world we're in. And that's changed, right? It's changed for a number of reasons. One, on the labor side, as I've just been saying, we're in a structurally tight labor market so that labor is, is no longer, so readily available. And two, on the capital side, we've been tearing up, trade agreements, we've been putting in tariffs.

18:58

You know, we have geopolitical issues, where we're no longer, you know, importing from certain countries or exporting to, to certain countries companies since Covid, are now talking about supply chains. I mean, when did we ever really worry about supply chains pre, pre-COVID. All of a sudden that is, is much more of an issue, than it was before.

19:24

And what we're also seeing or have seen since, Covid is a series of sort of one off supply shocks. Right. So this is not necessarily an inflation, high inflation environment of too much money chasing too few goods. Or though government budget deficits are now sort of 6% of GDP as far as the eye can see. But we are in a world where, we're seeing more and more supply shocks.

19:55

Right? So we had Covid then we had, Russia, Ukraine, then we had tariffs, then we had an immigration push back then we had One Big Beautiful Bill, then a war. Now we're probably going to have more tariffs. We have to renegotiate the Usmca probably this summer. So that's going to result in likely some more tariff wars.

20:17

So all of those things are sort of one-off tariff shocks. But I think ultimately what it means is, inflation remains a little bit higher. It's a little bit more volatile. So I think the old world where we were in was one where, 2% was more of a ceiling. And now we're sort of in a two and a half to 3% world and more volatility around that, that mean.

20:42

And I think that has important implications for, for investors. I think it has important implications for the reaction function from the fed. Right. In this old world, the fed could basically keep rates lower for longer. So if there's no inflation risk you can just hang out and and not worry about, about keeping rates lower. The problem in that old world was, disinflation or deflation that you need to maintain demand high enough to, to prevent deflation from, from happening.

21:21

So I think in that world, what it meant for the fed was it could be highly preemptive. So anytime it saw the labor market slowing a little bit, it could cut rates very, very quickly and keep them lower. It could provide this thing called forward guidance. Because, you know, we knew that there was no inflation, going forward.

21:43

And then it could act preemptively, as I say, I think in this new world that's all out the window, right? I think the fed has to be more reactive than preemptive. It has to wait until it sees what happens to tariffs. Oh, we were going to cut rates, but now there's this tariff shock. We got to look through it.

22:03

But we've got to make sure that inflationary expectations remain contained. Then we got a tariff I mean immigration shock. We got to wait for that. Then we have the war. We got to wait for that. And ultimately, what you're seeing is rates just held higher for longer. So that sort of futures market curve of fed funds, which was always sort of going down here as now sort of, you know, gone up here and the fed can't provide any forward guidance because it doesn't have the clarity that it had before.

22:31

You have fiscal policymakers making these decisions and changes, over which the fed has, has very little control. And as this chart shows too, it's the a cyclical inflation that's driving things. So the fed has more control over more cyclical inflation. It has less control over the a cyclical inflation. So I think that's changed that reaction function is changed.

22:59

And I think that's showing up in financial markets through the stock bond correlation. So my favorite chart of the last few years, I think maybe some of you have seen it. But I think it for me, it captures everything. It captures, a world where, the financial markets picked up very quickly during Covid that this inflation regime had changed.

23:23

And what it shows is that the correlation is not constant over time. It changes over time. But it only changes over long periods of time. Call it regimes. And what drives that relationship is the inflation regime that we are in. So in a disinflationary deflationary world where there are no upside risks to inflation, we get a negative correlation.

23:48

Right. So bonds were providing portfolio insurance for your equity market. Your your 6040 portfolio. Now I think that is flipped. So that correlation is is now positive. And I think bonds are seeing that there are now two risks in the world. So previously in that old world there was just one risk, which was downside growth.

24:13

There was no inflation risk. Now we're in a world where there's downside growth risks and an inflation risk. So I think the bond market is saying, you know, this is the term premium. The bond market is saying, whereas previously in that old world, we were willing as bond investors, we were willing to accept a negative term premium because you were providing us with that portfolio insurance for, for our portfolios.

24:44

But now hang on a minute. You're not providing us with that anymore. So I'm not going to pay for like an auto insurance premium, your bond portfolio premium. I'm not going to pay you a premium for something I'm not getting. So I want you to pay me a term premium. So I think in that old, hang on, in that old world of the negative, relationship, I think that meant for investors, you could run much more highly concentrated portfolios.

25:16

And I think today, in this world with bonds providing less, downside protection, for you, the the answer is, is that you need more diversification. And I think you need valuation as a cushion, as well for those portfolios. So the bond market is telling you that it's saying, you know, give me valuation through through a term premium that they didn't necessarily need before.

25:46

Is the equity market asking the same thing and mixed? I think, you know, certainly parts of the equity market, I think, we're seeing that, where valuations have been, highly compressed. And I think, you know, we're certainly seeing you're probably seeing that in parts of your portfolio and a lot of the companies today. But I think what we're seeing is, you know, certainly a very bifurcated market where there's everything related to to AI and everything else is just kind of being ignored.

26:21

And we're seeing that in the numbers, too. So if you look at, measures of diffusion, say for the market, those are extremely high. So that's the, the spread between, returns in, in the, in the equity market. So some are doing really well, some are doing, very poorly. You can see that in the correlation of the returns is extremely low.

26:46

So, my view is that, some parts of the equity market are providing that valuation cushion. But if you look at just the aggregate PE for the S&P 500, it's it's reasonably high. If you look at an equally weighted PE, it's a little bit above, average. So I think equities again are important in that diversification story.

27:15

You know they do provide some upside protection against inflation, as this chart shows. But but only to a point. Right. So, if inflation is kind of between 1 and 4%, you see the PE ratio is kind of all over the shop. As inflation goes below 1%, you start to see more multiple compression because that that's probably means you're in some kind of disinflationary deflationary event where the economy is slowing quite sharply.

27:48

And if inflation moves over 4%, then you get the compression as well, because that's when the central bank has to step in more aggressively. Which I think is, is the risk today. I don't think we're going above 4%, but I think the risk for the market, the biggest risk is interest rates. If we look at past, periods of enthusiasm, I'll call it, you know, what has generally, rock that is, is is higher interest rates.

28:19

So I don't, I don't think, we're en route to much higher interest rates today. But I do think, it's unlikely that we're going to see much in the way of cuts. When Kevin Warsh comes in and final slide here again, I think as part of that, sort of portfolio diversification, I think what we can see is that, quality has performed quite poorly, in the last few years.

28:49

That's unusual. Often, you know, when you come to this conference, you know, the, the reaction you get from a lot of investors is, oh, yeah, that that was such a great company I saw, but it's just too expensive. And I think now it's like, well, actually it's not so expensive, but then everyone hates it because, you know, maybe they've got, you know, poor performance at the moment.

29:13

But I think, what this chart just kind of shows is, is that, quality again, provides some of that diversification in your portfolio where you've lost some of that from bonds. And actually, it does do well during moments of, of, of economic weakness. So I think that's, interesting where, where sort of, you know, quality was growth and now feels like quality as has become value.

29:40

So I'm flashing red here. My time is up. But, thank you very much. And, certainly happy to see you this evening or bump into you in the hall if you have questions. Happy to, to take those then. So thank you very much.