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In the third quarter of the market taking a step back from that tech trade. With the market broadening and showing signs of resilience, as stocks look to close out the month higher, joining us now for more, we've got Kevin Gordon, a director at Charles Schwab and a senior investment strategist. Kevin, thanks for coming in studio. Always great to see you. Good morning. So I want to get a sense of what the thesis is with what we're seeing in this market, right? And outperformance in utilities, downward pressure in tech. What is that telling us?

Well, I think, you know, beyond the utilities story, which I think some of the defensive, you know, trade that has caught up, whether it's utilities or staples, a lot of that, to me, was driven by sort of a a big washout that was maybe overextended when you look at last year. So by the first year of this bull market, which started in October of 2022, if you look at performance for utilities and staples in particular, not only did they break through their bare market lows, but they made sort of new all-time relative lows to the S&P. So I think that the catch-up, you know, whether it's driven by anything AI-related in the utility space or any sort of fear in the economy, to me is more of just a catch-up. It's not as much of this definitive leadership shift to the traditional defenses, because as you were showing on that performance board a little bit ago, some of the more classical cyclical parts of the market have been doing relatively well. So the leadership profile has shifted from, you know, tech and communication services only to industrials, financials, uh, to some extent, you know, parts of the materials world, uh, most, you know, courtesy of what's going on recently in China. So I I don't think it's as much of this definitive leadership shift in in terms of defensives now catching a bid because there's some recessionary fears spooking the market or driving the market. I I think it's much more of a broadening story, um, by virtue of, you know, or driven by what was a complete washout in the defensive names at the end of last year.

So, Kevin, given all that, and given the fact that we have seen this outperformance, at least in the second half of September, we've bucked kind of that seasonality narrative that we've talked about so much going into September. What does that then signal, I guess, for the rest of the year? Are we likely then to see some sort of outperformance, or could this just be more of a one-off?

You know, I I think, well, from a broader perspective, in terms of market breadth, you're in a better position, I think, just for all sectors, save for energy. I mean, energy is the only one right now that has fewer than half of its members trading above their 200-day moving average. So you've got a pretty significant chunk of the market in an uptrend. You're at 81% of S&P 500 members in an uptrend. Um, to me, the quality bias is, but been much more, I think, of a stark point, um, if anything. Because if you look at the breadth profile for the S&P, the Nasdaq, the Russell 2000, it's pretty clear, uh, where investors have been sort of biased and and favoring in terms of market performance and what the dominance has been. So I think that large cap quality, in particular, should continue to fare well because it's got the stronger breadth profile. If you move down the cap spectrum into small caps, I think that for an index like the Russell 2000, you're probably still going to see, you know, a relative struggle there, uh, mostly because of the earnings profile, the fact that forward earnings growth is still sort of trending lower for that index, whereas for the large caps, you know, you're still accelerating at a pretty a pretty healthy clip.

Now, given not to get you to comment directly on one of your peers within the industry, but David Costin of Goldman Sachs is out with a note on Friday night, I believe. And it caught our attention because he was talking about the fact that if we do see a strong jobs print out on Friday, maybe that then is going to cause or trigger, I guess, make it more likely that investors will then be willing to take on some of that risk. Do you factor that in at all, or how big of a movement do you think?

I think, you know, it it's there there's definitely a case to be made for taking on more risk from the standpoint of if you want to move down the cap spectrum and go into higher quality parts of small caps, I think it definitely makes sense. It's it's, you know, not as common for investors, at least in our from what we see, to sort of screen in the small cap universe, because you're dealing with thousands of stocks, many of which, you know, the sort of the average person doesn't really research on a daily basis. There's just not as much coverage. But I think that what has been very clear, and what will probably continue to be the case as long as we stay in a relatively elevated rate environment, even if the Fed is still cutting, um is that small cap high quality small caps will probably still continue to do well. And that's what we've seen over the past year. So if you just take the profitable profitable parts of the Russell 2000, you look over the past year, they're up by almost 20% on average as a group. If you look at the non-profitable space, they're up by about 4 and a half percent. So right there, you're already starting to see a split where, yes, it has made sense to sort of start nibbling in that area or in that index, but to expect the broader Russell 2000, I think, to rally aggressively while we're still in this environment of relatively, you know, okay or mediocre GDP growth, not accelerating from a recession, um, and a labor market that's continuing to soften, to me, that doesn't scream small cap dominance or small cap outperformance, especially relative to large caps.