Mag 7's AI Show Me Story: Why Earnings Need to Meet Exceedingly High Bar

this week's bank reports and look ahead to next week's tech earnings as w Welcome in our next guest, Ellenbroek, Portfolio manager at Argent Capital Management. Good afternoon to you, Jed. So the banks kicked things off. T look pretty good. I mean credit quality is holding up. Nims look a little bit shaky. B just walk us through how you would characteriz kick off to the earnings season so far. Hey Sam and Marley, good to be with you Yeah you're right. I think the biggest takeaway for from bank earnings thus f is that deposit costs are rising and rising more than people expected. On the other side, I kl pretty good. You said credit was good. That's that's right. And you know I think like trading results for the Wall Street oriented banks were was pretty good. Not as good as last quarter's blowout, but still pretty good. A course wealth management invest management continue to do pretty well on the backs of rising equity markets. S overall, I think a pretty good earnings season. Most of the banks that haveted so far have seen their estimates, their earnings estimates for 2027 tick up a hair. So all in all I think good news. And Jed we've got big tech to take center stage here. You're expecting strong growth and ability alongside higher capital spending projections. How much of that optimism is already priced into these names. Yeah. I, I observe a disconnect between really outstanding lts fe Google and Amazon and Microsoft and Meta. Those companies have been reporting really strong revenues and profits for many quarters now. Earnings estimates have been going up for almost all of them. They're all reinvesting really aggressively in theiress, which is a good sign usually. So t businesses are performing well, but we've seen valuations decline steadily this year for those companies. And are you know they're currently on the low side. I think really for for all of those. So what whatlains that disconnect? I think the single biggest thing is all of all those companies I mentioned, our of them are taking virtually all of their profits and reinvesting it to build data centers. Andnvestors are just uncomfortable with that level of spending, that level of commi and conviction data center construction spendi And I don't really think that strong third quarter results, eve if we see acceleratingevenue growth from Amazon's AWS and Microsoft's Azure and Google's GCP, we're going to see acceleration from all three of those. I don't necessarily think that that's to be enough to convince investors to drop their skepticism regarding the data center investment. I think wh might take u is the growth rate revenues being higher than the growth rate in CapEx spending for those companies. And we're not at that point, we're not going to be at that point until t second half of 2027, I t which ishen a lot of these companies, which turn negative fr cash flow, are likely to posw again, we'll have to wait and see. But, you know, we very much see the mag seven reestablishing market leadership recent months. And, you know, you feel like the earnings was a big catalyst for that just because they started to show signs of monetary, you know, proof of monetization, I should say. I'm is going into Q3 now, what they have to prove in order to seethe end of the year, because it was that of handful of stocks that got us to those record highs in recent weeks. I mean, without them, obviously, we've hat the market can do. Yeah. Gosh, the market moves so fast. You k mean, lastek and ths preceding it, we saw an equity market led by the the biggest tech companies, those cloud computin giants. And you k Nvidia did well too. But thiswep reversal it big tech performed pretty poorly this So yeah, w just single stock volatility in markets. I think that's going to continue. Volatility around earnings season is evenreater than outside of it. You know so we're in wild next few weeks. I think if you look at like you kw what's the bogey that these companies need to beat Amazon's AWS for example. They grew their rev 37% last quarter. Thatas up from 28% the quart before. Those are great numbers. I think storse 42 or 43% in this third quarter that they're going to report in two weeks. Can they can they accelerate beyond that number? I think that's that's kind of what it'll take. And I think yos Azure business probably something like 46 or 47% growth that inves are expecting there. And Jed, you over a name that you like right now in this environment, you like. Dynatrace. I was looking at their chart. I mean, over the last six months, you could draw just a steady upward line for this name. So what aboutDynatras signaling to you that it's going to continuemove higher and momentum is going to stay behind it. Yeah. Cybersecurity is an increasing you know, it's a higher priority for businesses today. We all know AI allows, you know, threats and attackers to probe systems more readily than they were before and more frequently than they were before. So cybersecurity is a rising priority for businesses. Dynatrace makes observability tools, which helps large enterprises figure out when someth breaks within their cybersecurity presed how to fix it. I think that business, you kno stands to accelerate its revenue growth Businesses are trialingwo. products like this and, you know, before they deploy them. And I think that we're going to hit a real wave of deployment here over the next 18 months or so. A peer of theirs, Datadog has already seen that acceleration. They serve faster moving smaller companies generally. And that stock has been a really strong per this year. Dynatrace has done well too, butot as well as Datado I think it also has a more reasonable valua You're right, the stock has done really ver the last six months, but I think the valuation is still reasonable mething investors can buy today. Do you have a stealth mover, Jed, that you're keeping an eye on this earnings season? One that k typically flies under the radar that you like. Because, you know, as we mentioned ilast segment, Kagi likes to give us a few nugget I mean, he's looking at steel dynamics, which I don't think is on many people's next week. But have yougot anyg tabs on right now? Yeah, sure. Medpace MEDP is the tic Medpace is a companyt shepherds drugs through the clinical trial process. So th an outsourced clinical trial pro and they particularly do well serving l ah companies. So Medpace is a pretty good read on the state of drug development, broadly speaking. And i outstanding company. They've been led their founder and CEO for the last two decades. The company has a great long term track record, and we expect the company to grow double digits in coming years. We think their revenue gro is going to accelerate. We think AI is going to lead to increased drug development from a greater varie of companies, and that that greater variety are the types of customers that Medpace specializes in serving.u offering us a stealth mover. As Sam and I told Kevine last segment, we always like to know the ones nob talking about becauseftentimes with Kevin, they they tend to be big movers. So we'll kee a close eye on Medpace really appreciate you bringin. Also. Dynatrace and just your general thoughts. Hope you have