Taiwan Semi & Netflix earnings reviews are both coming tonight.

Things are getting a little frothy. Valuations are zooming, the S&P 500 is approaching 25x forward earnings, high-beta names are rallying the most aggressively, pre-revenue companies are fetching $10B+ market caps, real geopolitical risk is being shrugged off as irrelevant, SPAC appetite has returned and options volumes are setting new records. All in all, some degree of euphoria has crept back into markets since the local bottom in April.

And while that’s unnerving, this does not feel like 2021 to me. The instances of ridiculous valuations are more confined to certain pockets of companies rather than market-wide. “30x sales” is getting a tad more common, but (thankfully) has not become a routine part of the conversation like it was then. Furthermore, “don’t fight the fed” right now continues to mean own risk assets. The opposite was true in 2021. There are almost surely more rate cuts coming and we have not even seen the end of the current quantitative tightening (QT) program. As that comes, liquidity conditions and credit spreads will improve from already healthy places.

We’re in this weird place where many companies are ahead of themselves in terms of valuations, but unemployment is very low, growth is reasonably good and monetary policy could easily stretch those hefty price tags even further in the quarters ahead. More deregulation and tax cuts should also support markets.

When balancing all of these puts and takes, I don’t think it makes sense to start liquidating names and hoarding cash. But? I do think it makes sense to do some modest profit taking in the most expensive names. I’ve decided to raise a bit of cash and shift some of those proceeds into lower beta, less risky names.

I leaned most heavily into higher beta names like Shopify, Zscaler and Trade Desk in April to seek out more market outperformance as the selling got overdone. I was confident that when markets did find a bottom, these names would bounce the most meaningfully. That has played out and we’ve added material incremental outperformance vs. the S&P over the last few months. Considering these same names will likely fall the sharpest during the next market correction (whenever that comes), I think it makes some sense to do the opposite. Risk/reward is deteriorating and I think getting more defensive is prudent. Again, As is usually the case for me, this shifting is modest in nature and involved the following transactions:

The two charts below are the same. The primary source is just very hard to read.