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- So Nvidia reports earnings
on Wednesday after the bell.

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Sometimes even when they
surpass expectations,

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the markets are unhappy, do
they have to blow out earnings

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for the markets to react positively?

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- It speaks to the idea
that the, whether it's,

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you look at kinda the valuation

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or kinda the assumptions

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that go into NVIDIA's price are

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ultimately a high bar, right?

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The, the market is expecting

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that this AI growth theme
continues for quite some period

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of time, that Nvidia continues
to capture a large portion

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of market share, that
their margins stay very

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healthy where they are now.

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And if there's any sign that that story

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or that narrative is breaking
in, in some way, shape,

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or form, then I think again,
investors look at this

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with a very high bar and if
Nvidia can't exceed that bar,

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sort of to your point, there's
a disappointment around that.

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And I think it speaks to the
broader AI theme as well.

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And some of the other companies
that have been, you know,

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the poster children,
the magnificent seven,

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those mega cap tech names
that have benefited from

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that narrative, just this
idea that going forward,

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valuations are really demanding.

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Expectations are really
demanding in terms of

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what investors are looking for

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around their execution on these themes.

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And if they don't meet those
high bars going forward, they,

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they can't exceed those, then
that's where you see the,

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the sort of knee jerk reaction people

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selling off these stocks

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because that, you know,
uncertainty starts to exist to a,

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to a greater degree than
where it has been before.

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- So the majority of the growth,

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or in the indexes has been in the Mag

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seven over the last couple years.

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What risk does such
market concentration pose?

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- Yeah, I would say if you
look historically at episodes

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where you have a significant amount

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of concentration at the top of markets,

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meaning the top 10 names

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or so, what they represent is a percentage

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of the aggregate market cap.

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And right now we're, you
know, in the 30% range,

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mid thirties, something along those lines

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generally doesn't end well, right?

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It, it, there's just a huge amount

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of piling into these names
that happens from investors

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that you create this
momentum that begets buying,

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begets more, buying, that sort of thing.

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And ultimately, when there
is a reversal, of course,

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if the narrative does start
to break, you know, again,

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go back to the AI theme, right?

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If the execution isn't
absolutely spot on going forward,

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when you start to
extrapolate the assumptions

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that are built into these
stocks, that's when you can start

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to see a wave of capital
outflows from these names.

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And that's again, historically speaking,

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what you've seen now these businesses,

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they're phenomenal businesses, right?

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And, and I think they've, it's sort

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of been warranted the idea

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that their growth has exceeded
the rest of the market

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and they've again, I think,
been deserving of the status

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to be market leaders.

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When you look at the relative
earnings growth over the last

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several years for our, you
know, from our perspective

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and as we look forward and we
think about investors, sort

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of the basic portfolio management
principles that we go to,

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we think about diversification and,

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and sort of this idea of, you
know, how do you avoid some

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of those concentration risks For us,

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it's taken some chips off the
table rebalancing into other

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segments of the market that
now the earnings growth picture

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starts to look a little
bit more favorable.

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The sort of expectations
are coming down a little bit

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for earnings growth for the
likes of Nvidia and Microsoft.

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The magnificent seven

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and earnings growth potential
is ticking up for the,

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let's call it s and p four ninety three,

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the non magnificent seven names.

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And that I think gives us the,
the specter of a potential,

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you know, sort of convergence
in performance going forward,

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if not sort of an outright
rotational opportunity

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for investors, kind

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of relative value going from
something really highly valued

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to something that's more
reasonably valued in the market

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with fundamentals now that, again,

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start to converge a little bit.

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So that, that to us is the way to play it.

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But again, Ben deserved, I
think for the magnificent seven

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to see the gains that they've seen.

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- So in the other, the s and
p 4 93, are there any sectors

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or companies you're looking at

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that investors should
consider investing in?

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- How we kind of frame it
up is there's, there's tech,

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there's the mag seven, the,
the mega cap tech names,

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and then everything else.

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So there's sort of that very,
very high level taxonomy for,

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for us, and I think we just want

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to be a little more focused
on the everything else bucket

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over the next, you know, 12 plus months

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and thinking about that relative value,

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rotation opportunity.

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But even within that, I would say sort

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of value segments of the market.

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So that can be things like
industrials, materials

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can be even things like,
you know, consumer staples,

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healthcare, just these sort of segments

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that have been a little bit left

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for dead in some respects
over the last several years

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because their earnings
have been kinda middling.

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You know, the growth
hasn't quite been there

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to the same magnitude that the tech

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earnings growth has been.

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We just think, again, there's
an opportunity for capital

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to flow into those segments.

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In particular, if we look at kind of the,

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that forward looking picture
for the new administration,

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if there is gonna be more fiscal stimulus,

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if there's gonna be
deregulation, you know,

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financials a big piece of the value index.

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You know, you look at these other segments

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that could benefit from kind
of this pro-cyclical type

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of growth backdrop that we
could see going forward.

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And that to us represents a
compelling proposition relative

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to, again, these tech names
that have done so well

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and now trade at really
demanding valuations.

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- And thanks for watching.
Stick with qz.com for more.