Most important take away

Despite 40% of S&P 500 stocks being in individual bear markets (down 20%+), the overall index is only off about 5% from its highs because the declines happened at different times across sectors. The hosts argue this rolling correction is actually healthy, resetting stretched valuations, and that bearish sentiment at current extremes has historically led to strong forward returns (around 16% higher one year later). The biggest risk is the Strait of Hormuz conflict dragging on and pushing oil prices high enough to trigger real layoffs and consumption declines.

Summary

Market Overview and Sentiment

The S&P 500 is down roughly 5% from all-time highs, with the Nasdaq off about 8%, but the pain feels much worse because 203 stocks (about 40%) in the S&P 500 are in individual bear markets. Tech stocks are hardest hit (61% in bear markets), followed by consumer discretionary (57%) and financials (39%). Despite this, credit spreads remain contained, the VIX spiked briefly to 35 but settled back to 24, and weekly jobless claims remain near 200,000 — all signs that systemic stress is not yet present.

Actionable Insight: Bearish Sentiment Is Contrarian Bullish

The AAII bull-bear spread has dropped to its lowest levels in years. Historically, when sentiment is this negative, forward one-year returns average around 16% higher. However, this indicator works best at extremes, and the hosts debate whether we are truly at an extreme yet.

Key Risk: Strait of Hormuz Conflict and Oil Prices

The Iran conflict and closure of the Strait of Hormuz is the primary macro risk. Jim Lebenthal notes there was a 2-million-barrel-per-day oil surplus before the conflict, so prices should normalize quickly once the strait reopens. If high oil prices persist beyond March/April, businesses could begin pulling back on hiring and spending, turning a sentiment problem into a real economic one. Watch weekly jobless claims: a move from the current ~200K toward 250K would signal trouble; approaching 300K would be alarming.

Earnings Still Holding Up

Earnings revisions remain net positive for both the Nasdaq 100 and S&P 500. The current drawdown is driven almost entirely by multiple contraction, not earnings deterioration. The hosts note this is a healthier setup than a fundamentally driven decline. However, if oil stays elevated and supply chains are disrupted, earnings revisions could start turning negative — by then it would likely be too late to act.

Stocks and Investments Discussed

• Microsoft (MSFT): Has underperformed the S&P 500 over five years despite massive earnings growth. Now at ~22x forward earnings (down from mid-30s), with a PEG ratio below 1.0 and an RSI of 36 — the most technically oversold in three years. Lebenthal is loading up, adding to his position at half market weight. Actionable insight: at 22x earnings with 20%+ earnings growth, this is a compelling valuation entry point for patient investors.

• Amazon (AMZN): AWS demand exceeds supply; the advertising business is the third largest in the world and still growing. Strategic partnerships with Anthropic and a $50B deal with OpenAI/ChatGPT are underappreciated. Lebenthal is bullish.

• Apple (AAPL): Collecting nearly $900M in App Store fees from generative AI apps (ChatGPT, Claude, Perplexity) with no incremental CapEx. Trading at ~26x forward (down from 33x). The upcoming “Agent Siri” announcement could be a major catalyst. Lebenthal wants to buy but is waiting for a lower entry (low 20s multiple). Josh Brown sees Apple as potentially the stealth AI winner.

• Citigroup (C): Trading below book value with a 2.5% dividend yield. The Banamex IPO (Mexican subsidiary spinoff) later this year is a catalyst. Jane Fraser’s management team has improved profitability. Lebenthal calls it an “easy button” for investors.

• Oracle (ORCL): Down 50%+ from its 52-week high (~$160 vs. prior $350). The market doubts OpenAI can pay its Oracle contracts, but OpenAI recently raised $110B and will likely IPO and raise more. If even a portion of those contracts come through, earnings should flow to Oracle. Lebenthal sees it as a “coiled spring” if AI spending continues.

• Apollo (APO): Preferred among private credit/alternative asset managers because its investor base skews heavily institutional (pension funds, insurers) rather than retail, making it less vulnerable to panic redemptions.

• Meta (META): Technically looks poor. Market does not believe its AI spending is paying off beyond Reels. The insiders claim demand exceeds supply, but the stock reflects skepticism.

Private Credit: Headline Risk but Not Systemic

Gates (5% quarterly withdrawal limits) are expected to continue through 2026. The hosts stress these are contractual, not imposed on a whim. Defaults so far are concentrated in fraudulent underwriting, not cyclical deterioration. Private credit loans are senior secured, meaning equity must be wiped out first — and private equity has $8.9T in assets versus $2.5T in private credit. The real problem is relationship risk between advisors and clients, plus a potential chill on fundraising that could make refinancing harder for borrowers. Actionable insight: if you have not yet allocated to private credit, a post-shakeout entry with stronger covenants and better rates could be attractive — but stick with the highest-quality managers (institutional-grade funds).

AI and Jobs

Recent college graduate unemployment (ages 22-27) is at 6% and rising for three consecutive years. AI is displacing entry-level tasks (presentations, research, Excel work) that were traditionally given to new hires. The hosts see this as politically significant but argue that financial sector employment grew 20% (5.7M to 6.7M) over the past 30 years despite massive automation. The displacement gap may last years before new job categories emerge.

Corporate Buyback Blackout

Goldman Sachs expects 45% of S&P 500 companies to enter buyback blackout windows through the end of April. This removes a major source of demand. If a positive geopolitical catalyst arrives (Strait of Hormuz tweet) and the market fails to rally, that would be a bearish signal indicating a deeper correction ahead.

Chapter Summaries

Opening Banter and Show Introduction - Josh Brown, Michael Batnick, and guest Jim Lebenthal exchange personal stories before introducing Episode 234 of The Compound and Friends.

The Weirdest Stock Market Ever - The hosts discuss why the current market feels so strange: the S&P is only down 5% but individual stocks are getting crushed. Multiple risks are rotating — inflation, Iran/Strait of Hormuz, AI disruption — creating a “carousel of nightmares” unlike last year’s single-issue tariff market.

40% of S&P 500 Stocks in Bear Markets - 203 S&P 500 stocks are down 20%+ from their highs. Tech and discretionary are hardest hit. The hosts argue this rolling correction is healthy and resets valuations without a single capitulation event.

Bearish Sentiment and Contrarian Signals - The AAII bull-bear survey shows extreme bearishness. Historical data shows this sets up strong forward returns. The hosts debate whether capitulation is needed or if the market can simply reset through time and sector rotation.

AI, Jobs, and Creative Destruction - Discussion of how AI is displacing entry-level jobs, with college graduate unemployment rising to 6%. Jim argues this is another chapter in creative destruction (citing NYSE floor traders declining from 5,000 to a few hundred while financial employment grew 20%), but acknowledges the transition gap could be painful.

Microsoft Deep Dive - The stock has underperformed the S&P for five years despite exceptional execution. Now at 22x forward earnings with a sub-1.0 PEG ratio and deeply oversold RSI, the hosts see it as a compelling value opportunity despite near-term technical weakness.

Private Credit Panic - Extended discussion on gating, redemption pressure, and headline risk in private credit. The hosts argue defaults are not systemic, gates are functioning as designed, and the real problem is advisor-client relationship strain. A large institutional investment or acquisition of a private credit firm could stop the panic.

Stock Picks: Amazon, Apple, Citigroup, Oracle - Jim shares his favorite positions with specific fundamental cases for each. Amazon’s diversified business and AI partnerships, Apple’s toll-booth AI model, Citi’s Banamex catalyst, and Oracle as a coiled spring tied to OpenAI contracts.

Jim’s Book: How to Ride the Subway - Jim discusses his new book using the NYC subway as a metaphor for investing lessons, emphasizing patience and the non-zero-sum nature of markets.