@timmerfidelity

Portfolio Construction & Diversification

Timmer's central portfolio stance this week was the barbell: "I continue to favor a barbell approach of owning AI/growth, but 'hedged' with income-oriented equities from the 'ex-AI' space" [doc 7], arguing that "fast money shakeouts do not kill a bull market as long as the fundamentals support the trend" [doc 7]. He framed the equity market as "separated between AI and ex-AI, seeming to make it a binary choice to either stay at the party or go home" [doc 4], and identified multiple uncorrelated hedges: Eurozone banks ("a P/E of only 11x" and "largely uncorrelated to the S&P 500" [doc 4]), Chinese equities ("at 10.7x forward earnings have lagged far behind the MSCI EM index" [doc 3]), and the S&P 500 ex-AI basket ("only 20% correlated to the S&P 500 on a 50-day basis, much lower than the equal-weighted S&P 500" [doc 19]). Beyond equities, he asked "how do we hedge our bets?" given "concentration risk, AI froth, an evolving supply/demand picture, and possibly a rising cost of capital" [doc 5], and suggested "commodities remain the real asset of choice here, given that oil prices are now priced for success in the Middle East and given that the BCOM Spot index remains totally uncorrelated to both the S&P 500 index and the BBG LT Treasury index" [doc 11]. His most-discussed post — 15 replies — argued the supply/demand picture "remains OK, with the sum of buybacks and M&A activity vastly outpacing IPOs and secondaries" but warned to keep an eye on it as the secular bull advances in age [doc 12].

AI vs ex-AI barbell and uncorrelated equity hedges: Timmer's core trade: stay long AI/growth but hedge with income-oriented ex-AI equities. EZ banks delivered returns "on par with the AI space" at 11x P/E and uncorrelated to SPX [doc 4]; Chinese equities at 10.7x forward earnings lag EM and offer uncorrelated returns [doc 3]; S&P 500 ex-AI is only 20% correlated to SPX vs much higher for equal-weight [doc 19].

Commodities as non-correlated safe haven over TIPS: He argued "commodities remain the real asset of choice here" because the BCOM Spot index is "totally uncorrelated to both the S&P 500 index and the BBG LT Treasury index," while "TIPS on the other hand are positively correlated to both indices" [doc 11].

Share supply/demand as a secular-trend risk indicator: He flagged that the supply/demand picture "remains OK" with buybacks and M&A vastly outpacing IPOs on a 12-month basis [doc 12], but earlier in the week noted an "issuance boom underway (second only to 2021)" and that the capex boom is reducing companies' bandwidth for buybacks [doc 15].

Market Earnings & Valuation

Timmer framed Q2 earnings season as the key event, with "the growth estimate for Q2 at +23%, which seems like a high hurdle to beat" — though he noted "last quarter the estimate started at 14% and doubled during reporting season" and his guess is "companies will beat as usual, but maybe less so than in the past," citing the 2018 quarters that started high and beat by only a little [doc 17]. He observed that "trailing and forward earnings growth has continued to accelerate higher, with valuations taking a back seat," and "at 21%, trailing EPS growth is now close to the 2018 peak, which followed the TCJA in 2017" [doc 6]. On valuations, he argued "today's fundamentals are backing up the valuations" and "the chart showing the forward P/E against high yield credit spreads suggests that valuations are quite reasonable today" [doc 16]. For the ex-AI income side, EZ banks "returned 88% of their earnings via buybacks and dividends," equating to "a cash yield of 7.2%, which is generous compared to the S&P 500" [doc 8]. He flagged that "buybacks as a percentage of earnings is down to only 31%" because the capex boom is eating bandwidth [doc 15], and asked whether "the de-equitization era" that powered the secular bull since the mid-2000s is over, noting "the share count has been rising since 2023, and now buybacks are falling as well" [doc 18]. China, meanwhile, "has been the sole outlier in the race for higher payouts" [doc 13]. His highest-engagement post here — ~6.8k views, 45 likes — asked "Is the de-equitization era over?" [doc 18].