Viewpoints with Burkhard Varnholt - A global markets podcast (Ep. 76)

Burkhard Varnholt · UBS

Midterm elections matter for markets much less than most people think; earnings and rates drive stocks.

Burkhard says the midterms' market impact is probably much smaller than most expect. Markets are up because they prefer clarity over uncertainty. He argues Wall Street is driven by two things, earnings and interest rates, and that good earnings are made by innovative companies selling to customers, not in Washington. He says the factors that mattered before the election, earnings, inflation and interest rates, still matter now that it is over.

“Probably much less than most people think. Markets are up today because they prefer clarity over uncertainty. ... what's driving Wall Street is always the same thing. The same two things, earnings and interest rates. And good enough earnings aren't made in Washington.”at 0:58

Burkhard Varnholt · UBS

Earnings growth is outpacing index gains and the P/E cheapening is healthy; the bull market can keep climbing.

S&P 500 forward earnings are up 31% this year, but that lifted the index only about 10%, because the market's P/E cheapened by 14%. Burkhard calls this cheapening healthy, since bull markets die in euphoria. He argues that as long as earnings keep climbing, the bull market is usually doing fine, a contrarian read on the 'fear of missing out' being fading while 'fabulous earnings momentum' drives the rally.

“So the S and P 500 forward earnings this year are up 31%, but that only lifted the index around 10%. ... While the stock market's PE cheapened by 14%. And, you know, from my contrarian perspective, this cheapening is healthy because bull markets die in euphoria.”at 2:53

Burkhard Varnholt · UBS

China tech selloff reflects Chinese weakness, not AI failures; stimulus could reverse it quickly.

The STAR 50 index is down 40% over four months. Burkhard thinks this is driven more by China's weakness than by AI failures. Chinese investors are still spooked by the real estate crisis, and many Chinese companies prioritise market share over profits, so their exports are exporting deflation. That hurts their earnings and the Chinese stock market. He argues from a contrarian view that government stimulus is coming, that officials will re-emphasise profits, and that the market could turn around quickly once bad memories fade.

“I think that's probably more driven by China weakness than by AI failures. ... There'll be government stimulus. ... Bad memories fade, and then suddenly this market can turn around very quickly.”at 3:48

Burkhard Varnholt · UBS

Investors should make sure they hold enough cybersecurity companies, as the heist-driven spending will persist for years.

The $6.5 billion crypto heist was shocking, and Burkhard suspects bad actors are using AI. A hack of this kind was waiting to happen somewhere. Because cybersecurity companies will be needed for the next couple of years, he argues investors should check that they are sufficiently invested in them.

“Investors should probably double check that they're invested sufficiently into cybersecurity companies because they will be prescribing on this for the next couple of years.”at 5:08

Burkhard Varnholt · UBS

The heist exposed crypto's dependence on centralised exchanges, undermining its decentralised premise and trust in digital payments.

Many thought crypto was decentralised by design, but the heist showed it cannot do without a central exchange, and that is where the hackers struck. Burkhard also says the hack undermines trust in digital payments. He points to the North Korea link as a further geopolitical risk.

“For one, it exposed crypto's key vulnerability while many thought it to be decentral by design. Turns out it can't do without a central exchange, and that's precisely where they hack it.”at 5:12

Burkhard Varnholt · UBS

Bond markets are less worried about inflation and deficits, accepting a productivity-led growth view with well-behaved rates.

With the 10-year Treasury yield back below 5%, Burkhard says the bond market is less worried than a few months ago about inflation, debt and the deficit. He says it is not euphoric, just less worried. He argues bond markets can spot a seismic shift before others do, and that the calmer market is accepting his 'roaring twenties' view of productivity, contained inflation and well-behaved interest rates.

“I think the bond market just seems a little less worried than it was a few months ago. ... not euphoric, just less worried. ... today, they're really accepting our roaring twenties view about productivity, inflation, and well behaved interest rates.”at 6:29