00:00 Speaker A
All right, let's take a look at our sector of the day today, and that is consumer staples, the only S&P 500 sector in the red for the third quarter, off nearly 4% in the last three months. So, what does this tell us about the market, about the economy, about the consumer? Still with me, we have Omar Aguilar, Ally Canal and Anz Ferreira. So Omar, let's go to you on your view around consumer staples and and I guess just when you look at both that sector and the broader sector action in the third quarter, how you're seeing uh the market's turn as we moved through the summer and I think investors started to kind of move on from that tariff that headline-driven market that we really seemed to be living in in the first half of the year.
01:10 Omar Aguilar
Yes. Um the the the main thing about consumer staples uh and in general what we called the defensive sectors like healthcare or utilities and staples is, you know, they provide a stability and each one of them have different mechanics on how they generate earnings and how they generate, you know, free cash for yields. In the case of consumer staples, I think the assumption of investors so far and what we saw in the earnings in in the second quarter, you know, was really more related about, you know, the levels of yields and margins got compressed and then got down in through their long-term trends. And a lot of that was a result of the assumption that tariffs will probably have a significant impact in their inputs. Whether or not some of these consumer staples uh company needed to bring some of their uh supply chains and that could potentially increase their costs, you know, in areas where, you know, they don't have big margins to support it. So the assumption, you know, behind the performance was that the levels of free cash flow will continue to deteriorate as margins, you know, get squeezed, you know, because of the potential supply chain disruptions or increased costs. So that's a little bit of what is going there. And in many cases, you know, they tend to have a premium in periods of high volatility or sentiment being down. Uh we saw a little bit of their good performance early in April, but since the market took off after that, I think we have seen that deterioration as other other parts of the sectors like technology have provided that stability with attractive yields, with attractive margins.
03:03 Speaker A
You know, and thinking about and as that yield component of the consumer staples trade and where you see that in other sectors, uh it makes me think of utilities which has been a strong performer and I know it's you've written about a few different energy plays within that context that it's really become an AI trade now. So you get some of the yield, but then you also have this other component bolted on to what's, you know, typically thought of as a more defensive and frankly sleepier part of the market.
03:41 Ann-Nez Ferreira
Yeah, 100%. Utilities definitely benefits from the lower yields and it is part of the AI trade because you do have this whole infrastructure grid upgrade that is happening and that is touching the utility space. It's also even touching the energy space which energy was up last quarter as well. Uh so you you when you're talking about the AI trade, you're not just talking about the data centers, but you're talking about all the energy that is going into uh the data centers. You're talking about uranium for nuclear plants. So all of those parts of the markets have see seen uh the price of these stocks going higher. You've got GE Vernova, you've got Constellation Energy, you Vistra, you have all these uh stocks that have gone higher because of this play and Wall Street still expects this to be bullish. I mean, the next big trade that Wall Street is talking about in conjunction to the AI trade is this uh energy uh component, the electrical grid upgrade component of that trade.
04:52 Speaker A
Yeah, I've got uh our colleague Jake Conley hounding me on a story around energy trading within tech companies. I know I've seen a few of those around. So maybe that's the next uh leg of this.
