Hello and welcome to The Download. I'm your host, Dave Richardson. And it is a scorching hot, Stu’s days. Stu, it is a million degrees here in Toronto where we tape this podcast. And what most people won't know, watching or listening, is that my office is always a little bit warmer than outside, and it's hotter than any other office in this entire building. I can't explain it.

Well, Dave, it may not surprise you to know that every time we move offices on this floor, I make sure I'm on the north or east wall precisely for days like this.

Yeah, but I'm on the north side. That's just unexplainable about it. And then the two offices beside me are actually cooler. So I don't know what it is.

Yeah. Well, it's just probably all the activity going on inside your brain and things like this. It's just working on all cylinders.

Well, people have said that, your office gets a little bit hot when you're stewing it up in there with the thinking about big trades and making money and doing all that stuff that we like to talk about. So, we were just chatting about what we were going to talk about today. And we will get to the conflict in the Middle East and just generally some things about conflict and everything that's going on. But we thought it might be a good time just to reset everything. We're midway through the year. As we get into July, we're going to get a whole bunch of earnings, which are going to give us, as you say, the weigh scale on the market in terms of seeing where we're at with some of these companies, the impact of some of the tariffs, monetary policy, all these things coming together. So not a bad time to reset where we are through the first half of the year and what you're looking for. So first thing, Stu, we had this conflict in the Middle East, and I know I'd get out and I would talk to advisors and investors. And one of the examples that I would use when talking about why you want to focus long term on investing is because in the long term—we've talked about it a lot and you're probably the best I know in terms of laying this out—but the whole idea that profits go up about 7% a year, you throw in a dividend, you're 8 or 9% on a 25-, 30-, 40-year periods. Returns are pretty consistent. But in the short term, you never know what's going to happen. And one of the examples that I used is, all of a sudden you have a conflict between Iran and Israel, and what would happen to markets? And everyone's like, wow, that would be terrible and we're going to see these big movements. But that’s not what we've seen. Does that surprise you? Or are there unique elements to the way this has played out that have created such a modest reaction? Oil jumped a little bit at the beginning. It's all the way back down after yesterday. So anyways, what are your thoughts on that?

Well, it's a great question. On the one hand, is it believable that markets are so efficient that they quickly discount that the impact of these events will be maybe a bit shorter term in nature? Obviously, they're hugely impactful to the areas involved, but to the broader global economy, how long is the tail on some of these events? And in each case, we've seen repeatedly through history where we get uprising, normally it's discounted and digested reasonably quickly. A lot of the key commodities or key issues hit their extremes right at the beginning and then they fade off after that. So ever since the conflict in the Middle East reasserted itself, there has been some volatility, but nothing significant, and markets have digested it quite quickly, all things considering.

Yeah, and it just seems like, although things have calmed down—we have a ceasefire in place—I get a sense that there has to be more to come to this. Not that I'm a Middle Eastern conflict resolution specialist, if there is one, but it just seems like the market shrugged. What you would have thought was a big conflict that was coming at some point down the road, and then here it is, and it just shrugs its shoulders and moves forward.

Yeah, on the one hand, you've got warfare with drones that we haven't seen before, which changes the landscape and a lot of operations that are happening under the cover of darkness and infiltration and all sorts of things. On that hand, you sit there thinking, well, that could have happened everywhere. Shouldn’t we be factoring that risk in a little bit more? On the other hand, could this have a major destabilizing impact on the price of crude versus past context. The United States produces a lot more crude than they used to. They're actually a small exporter. Some of the countries that are the big importers of Middle Eastern crude are more associated with some of those countries as well. So who are you harming if you really affect a big impact on the price of energy? So it's very complicated. And it could be that the market has it properly balanced, or it could be that the market said, I can't figure this out, so I'm just going to drive on. And I think that also goes back a little bit to the trend that was in place. Often the trend that was in place when these conflicts take place reasserts itself afterwards. So given the amount of attention to this, it's also worth taking a step back to what was in place before, which was valuations had moved back to slightly above average. But at the same time, the US Federal Reserve, which didn't lower interest rates last week, but has a lot of room to lower interest rates. So unlike other types of concerning periods, the Federal Reserve stands at the ready, if necessary, to provide some cushion to the economy. And the other component of that is that there is just a growing enthusiasm for not just the artificial intelligence companies, but what it's going to be used for. Could that improve the margins of other businesses, and what will the use cases be and what have you. So when we go into this balancing, slightly elevated valuations, not at the point that they destroy the long-term equity-like returns, but elevated against some of these cushioning components and things that might lead to higher margins. So when we get the dust settling, the market reverts back to its prior conversation. And that's where we're at. I would also say, notwithstanding some of these events, there has been some IPOs. And there's been some mergers and acquisitions. And the thing that's been interesting about some of the M&A activity is that it tends to happen in some sectors when there's tons of exuberance that happens. It's at the top. And in some sectors, it's when it's just stumbling along. And that's where you tend to get M&A that really pays off in front of the next cycle. And so we've seen some IPOs around stable coins, and that's been filled with enthusiasm. But we've seen some more interesting M&A in some of the sectors that haven't moved quite as far and might really set these companies up for very interesting profit growth in the next 12 to 24 months. We saw one in Canada where a domestic business bought a US operation. It's like a textbook. The domestic company's balance sheet had been delevered. So they had what we call lots of optionality built up inside their business because they could use that balance sheet for something productive and they were able to buy domestic assets that come with synergies from a US owner, use the balance sheet to make it quite accretive. And then this bubbling enthusiasm around Canada. Will we have more LNG? More energy infrastructure? It now allows investors to dream the dream. So you get M&A, and then you get a big share price reaction positively to that M&A. And we haven't seen that in a long time. So that's also been good to see. So my only point is that the old narrative continues to be in place, and it hasn't impacted business activity quite the same way that we want to. One of the things that we've talked about is, is there a cost to the chaos? Whether or not it's tariffs on, tariffs off? And whether or not that uncertainty still certainly exists at the consumer level—you can see it repeatedly in many of the consumer-oriented surveys—but at the business level, either people are gaining some confidence or becoming numb to it, but we're starting to see more activity on the business side, which is also a positive.

Do you think there really is an element of that numbing. The first six months have been nothing, if not active. Some would say chaotic, but active at the very least. There's just stuff flying all the time, every day. And at some point, markets just can't even keep up with it. They put their head down and say, hey, the economy is pretty good. Rates, if anything, look like they may fall from here. So we just chug on. When we look at the first half of the year, if we think of it as a first half, it's been a pretty good first half with a 20% drawdown in the middle of it.

It has been quite something from that standpoint. Fixed income markets are still open. So there's capital available to do things. The chaos, if you're willing to step up, maybe you get a slightly better deal than you otherwise would. Earnings estimates have been stable, if not spectacular. Like they came down through the middle of the first half, but they've stabilized. The last point, too, is we talk a lot about valuation at the headline index level, which is impacted by a handful of stocks. The valuation for the average company is not as extreme as those headline valuations would suggest. And so when people come to M&A or they come to putting money to work, they're still sitting there saying, well, I'm getting not a bad return. I can make this work. So it could be a combination of all those things.

So again, if we look at the first half, we've got a lot of things we talked about. We've had lower rates. Inflation has largely remained under control. We had the scare of the tariffs. We had the 20% drawdown. But we're sitting here towards the end of the first half of the year. We got the S&P back at 6,000. We've got the TSX at all-time highs. We've seen European markets, Canadian market, Asian markets do better than the US market. All of these are the things that we were talking about in the back half of last year or at the front end of this year, as we were thinking about what might happen. If you're looking right now—and we've done this thing where we talk about the earnings math and how much you pay for earnings, and you go towards the end of the year, and some of those estimates come down—but if you're looking at S&P at 6,000 right now, what do you think we need to see in the second half of the year to maintain that level? What would you need to see out of earnings, interest rates, inflation, etc.?

Certainly, no recession. I think you need to see the current estimates for the back half of this year and next year hold. That's going to be very important. I think the lessons that we've learned—we know them, but the market continues to teach them to us—is that this behavioral psychology becomes very important. So when markets are not priced at necessarily an extreme positive, but priced for better things, that's when we use our dollar cost averaging tool. If they're priced for negativity, we try and accelerate that or be a little bit more aggressive. And just like markets can do all sorts of things, if we get to more extremes, then maybe we'll even have to back off some of the dollar cost averaging tools. But we haven't been there. Maybe there's been pockets, but we haven't been there aggressively, particularly across all stocks at this juncture.

From your perspective, it's mostly about earnings? That we see these earnings come through in July and early August that are going to give us another good sign of the direction we're heading on that front.

100%. And when we look within the sectors, another reason markets have been strong. We've talked about financial stocks. They've done well in the United States. They've had bigger weights in non-US markets, and the yield curve is positively sloped, so that's favorable for their earnings. Technology, generally speaking, it’s been quite good. People feel good about those earnings streams. Industrial stocks, which are related to a lot of this CapEx, they've been pretty good. And again, that's around those earnings streams. There's been other sectors like health care and consumer staples, which haven't been as good. Health care is in the constant threat of tariffs and drug pricing and all sorts of things. And consumer staples, it's the middle of the store. It's had trouble getting volumes, trouble getting priced through, a variety of things. So even within the market, it's earnings at the top of the house, but also within each sector, figuring out who's got the wind at their back and trying to get capital in front of them. That's always the way. So the sectors that have been strong have continued on that front. I don't really see any major sector shifts at this juncture in the near term. But obviously we're always on the lookout.

And one of the big things that we talked about—we've had Dagmara Fijalkowski on here before—just that weakness in the US dollar, which has been one of the stories in the first half, and particularly coming since inauguration day, where there has been a lot of talk about America first, and a lot of policy decisions that have made for a weaker dollar. But underlying that, we've seen now a weaker dollar with the current President in office, and that weakness, it doesn't seem to be slowing down a whole lot.

No. There's two things we think about on that front. One, if we look through a bunch of financial models, particularly US companies that have a lot of their revenue outside of the United States, the type of exchange rates that sits in current financial models have not adjusted yet to the weaker US dollar, which is a benefit to their earnings streams when you're getting the conversion back. The second thing is, currency moves tend to be multiple acts in the play, and the move has been pretty dramatic. I don't think the play is over. Whether or not we're getting towards the end of the first act is always open for discussion. So you think back, and this goes back to some of the sentiment indicators, but you had even top European officials questioning the euro a little bit in the beginning of the year, and now their commentaries is that it's quite a bit stronger. They're doing their best, but it probably also is reflective of when we look at positioning data, there has been a lot of movement into non-US dollar positions, which is reflective of that movement and sentiment that we're just highlighting there.

Yeah. I had a chance to get out and have dinner with some of our listeners in Halifax and Winnipeg this past week. A lot of Stu’s day fans. Big Stu’s day fans. Big dollar cost averagers. It's making them feel comfortable about being in the market. And that's one of the reasons why it's been so effective over the last year, because it got you in and kept you in through the drawdown earlier this year, gave you a chance to buy at lower levels, and then now the recovery. So it's been a nice run for the people who have been doing that, thanks to dollar-cost-average boy who is now going to be super-charity guy. We got to be a little bit short this week because you're going to do a ride for charity, which is just completely in your character. You're always doing great stuff for people. So thanks for this, Stu.

We'll be spinning for sick kids. So we're about to let it rip here. And it's a great cause. Also nice to get some exercise. And thankfully, it's in an air-conditioned room on a hot day.

I was going to say, make sure you get that headband. We know Stu likes to wear the headband and you'll be dripping today, even in an air-conditioned room. Anyway, Stu, thanks again, and we'll get you next week.

Great. Thanks, Dave.