0:03 spk_0
Hello and welcome back to Trader Talk at Yahoo Finance. I am Kenny Polcari, and today, we’re talking to Christina Huba, who’s the chief market strategist at the Man Group, and Ryan Kelly, who’s the CIO at Legato Financial in Louisville, Kentucky. Thank you very much for joining me today. Look, there’s a lotThere’s a lot going on. So let’s just get to it because we’re in the middle of earnings season. This is a big week. Certainly a big tech week, but we’re gonna get about 150 names that are gonna report this week. So, give me your sense on where, where, what we’ve heard so far, which has been stellar, and where you think we’re going.
0:36 spk_1
So I think we’re going to continue to hear some really good news this week. Uh, earnings growth has just been phenomenal. Now, having said that, I think when we get to the consumer discretionary names, that’s where we’re going to see a good amount of weakness, and we’ll also get forward guidance that may surprise, right?
0:53 spk_0
So it’ll pull down.The growth rate right now, I think they said they’re growing at about 15 or 7, 16%. But I think once you start to get those weaker numbers, that number will come down. Still be good overall, but it won’t necessarily be this picture, I think that they’re looking at right now or the way it feels right now.
1:09 spk_2
What do you think? Yeah, I think we’re gonna have, uh, some very good reports from earning numbers. I think the CapE spending on the tech side has been worrisome for some investors. I think Google coming out with more.Capex and they have cash flow is something that just worried a lot
1:22 spk_0
of
1:23 spk_2
people.
1:23 spk_0
First time ever, by the way, that they have negative cash flow,
1:26 spk_2
right? Absolutely. So, uh, you know, I, I think it’s going to be a bit of a mixed picture as long as there’s all this stuff up in the air with Iran. Um, we just keep swinging back and forth about every week, it feels like. So
1:37 spk_0
doyou think, um, do you think the AI trade is over by any stretch of the word?
1:42 spk_2
I don’t think it is. I think the, uh, the kind ofHabit of just jumping into whatever the next small group is, you know, you jump from software to GPUs to memory to whatever it is. I think that’s over. Uh, I think we’re gonna have some stratification. There’s going to be some companies that are going to execute a lot better. There’s gonna be some companies that, that build some things that just don’t work as well as others. Uh, so some of the names that are up 200 or 300% are going to drop a lot, and I think we’re gonna continue to have pullback.Along the way in the whole sector.
2:09 spk_1
What do you think? So I, I’m a bit more circumspect when it comes to AI. I certainly think that it is a transformative technology. This is an industrial revolution, but having said that, if we go back to the telcos of the late 1990s, early 2000s, there’s a lot that rhymes, uh, and so I do worry in particular.About hyper scales because they have an enormous hurdle they need to meet. Uh, Bain came out and, and forecast that they need to get to, to a, a very high level of, uh, AI related revenues to make this worth it by 2030. That is going to be a tough,
2:50 spk_0
is thata stretch?
2:51 spk_1
I think it’s definitely going to be a stretch. Now there are parts of the food chain that are going to do very well because the hyper scales are spending so much. This is just the maturing of a technology cycle and so there are going to be winners and losers. There’s just going to be more differentiation.
3:06 spk_0
Right. And, and I, I think that’s right. And so this week, we’ve got, uh, Microsoft and Meta on Wednesday, and Apple and Amazon on Thursday, right? So Microsoft is gonna come out. Microsoft, which by the way, had gotten, has gotten really beaten up. I think, way overdone. I think they, that was like, you know, throwing the baby out with the bathwater because I don’t know. I own Microsoft, the firm owns Microsoft, so maybe I’m a little bit partial, but I thought it was a huge buying opportunity for a long-term investor.And I think it, it’s proven to bounce off that 350 level now. It’s trading with foreign change, I think, isn’t it?
3:39 spk_1
Well, yeah, and I think what’s happening is investors are becoming more discerning and they’re also reevaluating the different characteristics of many of the AI related plays. And so you may very well find that there’s a lot more reward, uh, that investors give to those companies that do still have strong positive cash flow.That are being more careful with how they spend, right? I mean, we, for a few years now, the philosophy has been the greater risk is to not spend enough. That’s changed. Now I think the greater risk is to overspend in this environment, especially if one needs to borrow to do it.
4:19 spk_0
Well, at what point are you overspending? Look, Google just came out and said that they raised their number to 205 billion.Right?
4:27 spk_2
And you have token usage by corporations, what, 1,000% year to date. So, I mean, I, I think we’re just at the beginning of figuring out what we can do with this whole new universe of. But,
4:41 spk_1
but we have to be careful because not dissimilar to the late 1990s, early 2000s, and I think we need to learn from past history, there are components.of this spend that can quickly depreciate and in fact in this particular scenario GPUs are a lot more expensive and they can easily become obsolete or you know less less useful because more powerful GPUs are created so there’s a real risk in throwing in a lot of money right now as opposed to being.Uh, more, more careful, more thoughtful about spending, right,
5:19 spk_0
which is why I thinkWhen we talk about tech, I still think it’s a very, very legitimate trade, but I don’t chase tech at all, right? We own it, it’s already in the portfolio, so I don’t need to play catch up and buy it, but I’m certainly not chasing it. Like, look at Apple and I love Apple. It’s traded at all-time highs. I’m not buying Apple up here at all. Just because why would I? Uh, we own it already. Why would I be buying it way up here when I’d buy it?
5:43 spk_2
Pullback. And has Apple been rewarded lately because they’re not hyperscaling and they’re not putting all the money into AI? Have they been reevaluated as the more traditional Apple company now? Right. Well,
5:53 spk_0
let’ssee what they say on Thursday. It’s gonna be interesting to see what Apple says on, on Thursday. And, uh, what should people be looking for in Amazon in your opinion? What could be, what could be, you know, the headline in Amazon that, um, that surprises everybody?AWS.
6:13 spk_2
I mean, I, I think everyone’s looking for some certain specific numbers on the growth in, in AWS, uh, saw actually earlier today that Meta is talking about coming out with a competitor for AWS. Um, but I mean, the good thing with Amazon is they have such a tremendous business outside of AI.They can support a tremendous amount of cash flow spend without having to monetize anything the way that, you know, with Microsoft, is that legacy software going to survive? Is it still going to be useful, you know, a few years from now? Is that all going to be replaced by AI? I, I don’t know, but I think the shopping is still going to be there.
6:49 spk_1
And I think a lot is riding on AWS. So, so I think that’s, that’s going to be critical, especially the forward guidance around it,
6:56 spk_0
right? I think it’s interesting because, because that is, I think one of the key things that everybody watches for when, when Amazon comes out, um.All right, so let’s talk about now kind of move past that because we’re going to get, you know, 146 other names that report this week on the S&P. Um, and to your point, they’re going to start representing these other sectors of the economy, which are going to be very interesting. You think we’re going to have a disappointing consumer discretionary sector report?
7:22 spk_1
I do, absolutely. The consumer is very weak right now. I mean, Obviously we’ve heard it, you know, over and over again. It’s a K-shaped economy.I think actually the bigger issue is that it is a P-shaped economy in that, uh, the top 10% have almost all the household wealth, right? And so I think of it as, as like sort of the, the upper end of the P, like arms holding on to everything, right? And then the, the rest of the line is where there’s very little and no one hasit.
7:51 spk_0
That’s interesting. I have never heard it defined as a, as a P-shaped economy. We should start that the case.What everyone’s been talkingabout
7:59 spk_1
and and income is not to me as important as assets because it’s assets that help cushion when there’s a downturn, right? We continue to hear, you know, survey results like, uh, you know, almost 50% of households wouldn’t be able to afford like a $500 emergency. So that really goes to the heart of, uh, you know, net worth and especially those households that have higher debt levels if it is.Um, you know, uh, a non-fixed rate, then you have to worry as rates go up that it’s going to become more expensive to service debt. So for a lot of reasons, it’s about, it’s about net worth.
8:36 spk_0
Yeah, but let me ask you a question. Consumer stables, on the other hand, are things that people have to buy every day, whether they, whether the market’s up or down or whether the economy is good or bad, you still have to go out and buy diapers and whatever, toothpaste and all the other stuff that you have to buy in consumer stables, right?
8:52 spk_1
Yes, you do, but I will give the caveat that you know in some surveys we are seeing responses like I’m skipping a meal. I’m so, so there is, so consumer staples, I think, will be, will be solid, but on the edges there is, there could very well be some weakness there too. But of course it’s all about consumer discretionary.And for the high, uh, you know, the, the stores, the, the, this part of that industry that is, uh, that’s largely about, you know, high net worth, uh, shoppers, uh, clients, that’s gonna be OK, but it’s the vast majority of households, um, below that that are really suffering.
9:34 spk_0
Do you have the same
9:36 spk_2
sense? Um, I, I guess I have a little bit of a different sense on, on some of that. Um, you know, we’ve had gas prices go up certainly lately. Um, however, inflation is significantly below where it was over the past few years. Um, so, you know, I’m still seeing Walmart and Costco trading at extremely high.Um, multiples, um, you know, we’ve, we’ve looked at some of the Dollar Tree, dollar general and that sort of thing and kind of had mixed results there. They went on a tear a few months ago and have, have suffered since then. So, um, I’m just, I’m really, really focused on what’s happening in the Middle East. I think that 90% of the issues with.Inflation and, and kind of that acceleration go away if that problem is fixed. Not that I think it is, but
10:20 spk_0
yeah, no, I do agree. Yeah, I, I, I agree if, if the price of oil could come down, but look, that’s the frustrating thing because a month ago we all thought this was signed, sealed, and deliver was over, right? That everyone was gonna.We play nice in the sandbox and we were gonna move on. Well, that clearly was not what happened, right? And so we saw oil spike higher again. I mean, Brent was over $100 last week and, and, and, and West Texas traded up to the mid 90s, 94, maybe 93. Um, and today it’s down becauseBecause, you know, we have supposedly another deal, but I wonder.Do we really have another deal yet, or are we going to be on the edge of the seat waiting? Well,
11:00 spk_1
first of all, let’s, let’s make sure we know what a memorandum of understanding is. I mean, when that was signed in June, that was just saying we’re going to essentially have a ceasefire.While we negotiate the real agreement. That was going to be the most difficult part of this. We’re finding that even getting a memorandum of understanding that we can stick to is a really difficult thing to accomplish. So I, I think that we’re very likely to have continued elevated prices, continued conflict in the Middle East for some time, right?
11:32 spk_0
Do you, do you
11:33 spk_2
think, I think that we are, and I’m, I’m not really sure if Iran is just playing for kind of the next.Couple of weeks out and if they’re looking for when we finally hit these other dates, if we’re going to get something done or are they really pushing all the way to the midterms?
11:47 spk_0
Well, that’s the question. Are they look, they’re well aware thatTrump’s got the midterms coming up, right? And if they drag this on long enough, I guess, I guess they’re betting on the fact that it, you know, it’ll flip everything, and the Democrats will take control of everything and leave Trump kind of sitting there as a, a lame duck, right?
12:06 spk_2
Well, I think if, uh, if the Democrats win, I mean, I think they’re gonna rein him in rather
12:09 spk_0
100%. Well, they’ll try, try,
12:12 spk_2
right?
12:12 spk_0
And if they win both houses, they’ll immediately start impeachment proceedings again, um.But I, but I, I do think, I, I, I think it’s, I, I think it’s naive to think that Iran isn’t playing that card. That, you know, that, that, that’s in the back of their mind that this is all going on. And look, we’re only 3 months out now, really, from the, from the election, right? And so now it’s gonna get even more, um, potentially more volatile as you start to kind of really get a sense of which way it’s gonna turn.I think the market is still expecting the house to go, but the Senate to stay. I think that’s what the sense is right now. Do you, do you agree with that?
12:49 spk_2
I think so. I, I think that you’d be seeing some different. I think if he was expected to lose both houses, I, I think that you’d be seeing a little bit more in terms of what Iran is doing. I think they’d be more aggressive, to be perfectly honest, more pressure
13:03 spk_0
on the market if that happened.
13:04 spk_2
I think they would be.
13:05 spk_0
Yeah, what do you
13:06 spk_1
think? Well, I mean, keep in mind that this is historically the worst year for the S&P 500, right? And so I, I, I, I’m actually surprised at how well the stock market has held up. We’ve thrown in this environment.
13:22 spk_0
We’vethrown everything at the stock market, and the S&P is up what, 9%. The equal weight is up nearly 12%.
13:30 spk_1
And it tends to rally when we get good news about the conflict in the Middle East, even though it’s nothing permanent. It doesn’t really go down as much when we get negative news. It’s bizarre, but it’s this gravitational pull up that’s really been surprising to me. I think it’s all about earnings growth, of course.Um, but I, I think that there could easily be, um, some kind of wrench thrown into this. I think it most likely, likely will come from higher yields.
13:59 spk_0
OK, so let’s talk about that. Let’s talk about the Fed and Kevin Warsh and where we think this is going because he can cut the short end all he wants. He can’t really control what happens at the long end. And, and the long end is where you’re getting those, you know, the 10-year and the 30 years, where you’re 20 years, where you’re getting these higher yields that he can’t seem to control. So what do you think happens next?
14:17 spk_1
Well, first, let me just say that, uh, you know, interestingly, there’s an expectation, I think that he’s going to be a hawk that literally the week after he was nominated, we started to see the San Francisco proxy Fed funds rate, which is intended to essentially be the real feel on monetary policy, right, factoring in other monetary policy tools in addition to the Fed funds rate that started to decouple from the.Fed funds rate. They had been moving in lockstep, and it started going up. Uh, and it’s gone up quite significantly really since then. And so I think the expectation is that sooner rather than later, he’s going to start to actually shrink the balance sheet. And so he will be to a certain extent, impacting rates on the long end. I, I don’t think he’s going to cut on the short end and what I’m getting is a, a more hawkish tone today than I’ve had, I’ve heard in the past.Um, Beth Hammock came out most recently with, uh, some comments that sounded very hawkish in terms of her concerns around inflation and also the feedback she’s getting from businesses in her district. And so, so I think, uh, you know, it’s no surprise that, that, um, the probability of a rate hike has gone up for a rate hike in July has gone up in the CME FedWatch tool, it was, you know, uh.
15:33 spk_0
Yeah, but I still don’t think rates going up. The September rate expectation went up to 70%. It was 43 weeks ago, then it went to 50%. Then after last week, it was a 70% chance that probability that there’s gonna be a hike in September, which is gonnabe interesting.
15:49 spk_2
Yeah, and less than 10% chance that we’ll still be at these rates in December, at least last time that I looked, so.Yeah, and there’s no one guessing at this point that we’re going down in rates. And it’s very surprising to me. I mean, you look at the tremendous pressure that Trump put on the Fed, that put on Jerome Powell. Um, I mean, my initial thought was this guy was brought in to cut rates, but only 3 of the Fed members were nominated by Trump at this point. Yeah,
16:13 spk_0
buthe can’t just cut, let’s be clear.It, it’s majority rule,
16:18 spk_2
right?
16:18 spk_0
He could get, he could stamp his feet all, all he wants, but if the majority, if he doesn’t get the votes, he doesn’t get the votes,
16:24 spk_2
and he’s actually talking these days like he wants to raise rates. He’s, he’s, I’m very surprised by what he’s saying, to be honest. But
16:30 spk_0
do you think he’s jawboning?
16:32 spk_2
Uh, is he looking for credibility? There was so much talk about, you know, the Fed is not going to be independent. This is Trump’s picked guy. He wants things to go a certain way. I think if he was just out talking a lot about cutting rates, I think that it would hurt credibility. But the bottom line is, he still has the power to do it as long as he has the consensus. So,
16:51 spk_0
but think about this. Think about the amount ofIssuance that’s coming to the market that’s only gonna absorbed, you know, buyers of that debt are gonna demand higher yields because there’s a lot coming, right? So they, so they’re gonna bid lower and so prices will go down, yields will go up.
17:09 spk_1
There are many forces conspiring to drive up rates on the Long Island.
17:13 spk_0
Exactly right, and he can’t do anything about that if he’s bringing all this supply to the market.Correct. Yeah. So that’s gonna be, you know, there’s a little bit of a conundrum there for him and for the market forinvestors.
17:25 spk_2
And the interesting thing is, what else is he gonna do? I mean, if you look at, everyone was looking at, you know, is he raising rates? Is he lowering rates, but so much of what else he said in this last meeting was a little unusual. We’re talking about potentially less messages coming out, different messages.
17:39 spk_0
Yeah, which, by the way, I think is great.I would love if he, if on Wednesday, he just came out and said, here’s what we did, and he turned around and he walked away, just the way Alan Greenspan used to do. He didn’t sit there and take all kinds of questions and, you know, rub your back and ask you if you’re OK and what do you think. Uh uh. The Fed used to come out and say, here’s what we did, you guys figure it out. And
18:02 spk_2
people forget that. I mean, I think that there was a big push for more transparency or during the great
18:07 spk_0
financial crisis, and I agree that that was probably necessary.But I think we’re beyond that, and he’s made it very clear he wants less, not more. Oh yeah,
18:14 spk_1
the radical transparency of the Powell years is done, uh, but I, I think that’s gonna be very hard because once you give markets something, it is hard to take it away.
18:24 spk_0
Agreed. And, and there’s a, look at, there’s a whole generation of people that came into this business right when that transparency was happening. So they, they didn’t live under the prior regime when that didn’t happen. I came into this since 1980.When, right, when Alan brief,
18:42 spk_1
when you’relooking at the size of his briefcase to figure out what he’s doing, right,
18:46 spk_0
to figure out what he was gonna say, and then he’d walk away, right? And, and remember the market was always had to try to figure out what, what it all meant.And so, look, he’s also made it very clear, Warsh, that he wants less, he wants less of these Fed members to, to, to, to do the circuit. Go on CNBC and Fox and Bloomberg and everywhere else. He doesn’t want so much of that going on because it creates chaos.
19:11 spk_2
Well, it creates a lot of messaging. Its me.that might not be part of the majority
19:15 spk_0
100%, which is, which is, which is what was happening because you get the people that came out dissenting saying why they dissented and, you know, and then the other people that came out on the other side. So there was this conflict, constant conflict back and forth. He wants to do away with that, which I actually don’t think is a bad idea.
19:32 spk_1
Well, I, I’m, I’m a big believer in, you know, more transparency. I, I like to hear different voices and hear what they’re thinking. I think it gives us insight into where, where they might go, especially if, if one’s making a more compelling argument than others.
19:49 spk_0
OK, that’s fair enough. And, and I think, I think that information can make its way into the market.I, I think,um,
20:00 spk_2
I worry that it’s not consistent, I guess is, is, like different, different Fed officials can come out and, and say whatever they want. There could be some that are quieter, some that like doing the interview circuit. So it’s, it is a little bit chaos with that. If it was maybe something that was more like a, you know, more regular release and everyone had to say something like an additional dot plot on it more often.Kind of maybe, which by the way,
20:24 spk_0
they’re gonna do away with the dot they are throwing it
20:25 spk_1
out,
20:27 spk_0
which I think is so interesting because here we are in 2026 and there’s actually people with a number two pencil drawing a dot on a piece of graph paper. I mean, it’s almost, it’s almost ridiculous when you think about it, but he’s doing away with that
20:42 spk_1
to get, uh, you know, any little bit of information, any color can be helpful, even though we know that it has been grossly.accurate in the past. I mean, we go back to December 2021 dot plot, right? They anticipated something like 90 basis points and rate hikes for 2022 and the rest, you know, we know what happened. The rest is history. So, so it can be wildly inaccurate, but it still was, it still gave us insight into what they were thinking at that, at that moment in time.
21:14 spk_0
Yes, but I think, oh, I, I think even if they, even if they have less of it.I think you’ll still.It’ll still end up making its way. May not be with, you know, with appearances on CNBC and Bloomberg and everywhere else, but I think it’ll get out there. Anyway, look, we’re gonna run out of time because we’ve already been here for half an hour, and, and I could go on for another hour and a half. But tell me real quick, at the second half of the year.I don’t know if you have any, a year-end target or not. I had this 75, 76 range on the S&P which I still think is where it could be because I, I think we’re gonna get a pullback and then a rally into the end of the year. There are numbers as high as 8000, which I think are fairly aggressive, but tell me what you think.
21:54 spk_2
I don’t love to put a number on it. I think trying to pick where the market’s going to be on an exact day is, is just too difficult. Um, I, I do think, and I was amazed today because, you know, it was talking to everyone this morning. Oh, it’s another risk on day, and then all of a sudden, you know, you’ll have lunch and come back and everything’s, you know, yeah, by the way,
22:11 spk_0
what flipped? Did something,
22:13 spk_2
Idon’t really know. I don’t really know. Oil is still down, which makes sense, um, but there is the, the same pullback on micro
22:20 spk_0
NASDAQ that’s under pressure again. Yeah, it’s,
22:22 spk_2
it’s the.names, it’s, you know, it’s
22:25 spk_1
part of the, part of the problem is that we are seeing credit spreads widen for the hyper scalers, and I think that’s exerting pressure right now. And, and, um, you know, sometimes it just takes time for investors to get, uh, morenervous.
22:38 spk_0
Yeah, and I don’t think, I don’t think that, that trade is, is done yet. I know Goldman Sachs came out last week and said, you know, it’s approaching capitulation in the tech sector, not the broad market, just the tech sector, that they’re exhausted.Uh, well, I think it’s true, I think there’s a little bit, I think we’re gonna push it one more time just to test it to see who gets anxious and, you know, does it hold or does it melt.I think it’s gonna be interesting to see what happens over the next couple of weeks, right? This week will certainly be a big week.
23:07 spk_2
Well, the capex spending has been what everyone is not a fan of lately, but I still think that there are a few names out there that have some value. I mean, Micron is still fairly cheap. Heinix is still fairly cheap if you can figure out how to trade it with the premium Micron’s
23:21 spk_0
on sale. It was traded at 1200 just a month ago, right? But to wait, before we go, I gotta ask you one question. IBM, tell me what you think.II like IBM. And look, when they crushed it two weeks ago, down 25%, it was down more than it was in Black Friday in 1987. Lost 23% of its value on that day. Last week or two weeks ago, it lost 25% of its value. But it brought it right down. If you look at the chart, right at the chart, 205 was that.Level that had been resistance and then it broke through, it became support, traded right back down there and held, and now it’s trading off thatlevel.
23:57 spk_2
But we’ve got a couple dozen names like that. I mean, that’s really the only one that was down 25% in a day, but Micron’s over 20% off of its
24:03 spk_0
high. Yes, but that happened in one day. And, and so, so do you like IBM or you don’t like IBM.
24:09 spk_2
Um, it’s, uh, it’s not one that is one of my favorites, I’ll say. Uh, maybe I need to take another look. You and I should have another conversation about it, but.
24:18 spk_1
Well, I can’t comment on individual stocks, but what I can, but I didn’t answer your question about the S&P 500. 1st of all, I think we’re going to see a lot of rotation. I think that we’re going to see wild swings like the ones we saw with IBM again and again now because so much is changing. The ground is shifting under our feet. Um, I, I agree with you that I think there’s going to be a sell-off in the S&P 500, but I think it’s going to take longer for there to be a recovery because I don’t think we’re going to have a willing Fed.
24:44 spk_0
Uh, it’s interesting. And we got the midterms in the middle of all that, so let’s see what happens. In any event, listen, thank you very much for joining me today. The half an hour went by way too fast, but I do appreciate you coming in and, you know, we could circle around probably at the end of the year, just to kind of see it, you know, how it all turned out as we discuss it. In any event, until next week, take good care.
