Why memory stocks could beat Nvidia

Welcome back. It's Kenny Pulcari and this is Trader Talk at Yahoo Finance. And today we're speaking with Jessica Insk who is head of research at stockbroker.com. Correct. >> Stockbrokers.com. Plural. >> Stockbrokers.com. And Phil Rosen, many of you know from opening bell media because uh Phil is uh a very very interesting uh interesting personality. He's got a lot going on. We're going to talk about that as well with Jessica and Phil. So, thank you very much for joining me. I appreciate it. Uh, look, there's so much going on here. We are in the middle of summer, an interesting first half of the year. There's, for every reason, the market could have backed off and it never did. You know, a little bit, but then we bounced right back. We find ourselves once again kind of in this geopolitical firestorm, this uproar again between the US and Iran. And now people are once again starting to get nervous. Oil is now shot higher. Uh, the Fed with Kevin Walsh is kind of in the spotlight. What's he going to do? What's he need to look at? He's also announced, you know, five new committees. Uh, and he announced the names of the people that are going to head those committees to really kind of take an introspective look at the Fed and talk about kind of what they've been doing, why they've been doing it the way they've been doing it, and maybe we should start talking about a new way to do it, which is all very interesting for me. It's a throwback to the Allen Greenspan days when I came into this business. And then after the great financial crisis kind of you know the Fed became in my mind a little bit too transparent in the sense that everybody on the committee got to say what they wanted thought it created some chaos. So let's talk about that first. Give me kind of your broad view on where we are where you think uh the second half of the year is going to take us. Let's start with you. >> Sure. I think markets are incredibly resilient. If we think about the shocks that we've been through there have been four since the pandemic and we've seen a resilient consumer resilient economy subsequently resilient markets. Now, I'm sure that could come to an end at some point, but we have headline risk. We have increased retail participation, which has increased volatility. Increased volatility leads to increased term premium, which links over to the bond market. And so, I think it's requires a little extra effort to actually analyze the market because of all the re increased retail participation and geopolitical tensions and we have to pay attention to all these various factors that impact it. To answer your question directly on how I feel about the second half, I think we're going to end up rather sideways. Actually, it's going to be difficult to go a little bit higher because of this tension and what's happening with two-year yields. Two-year yields attempt to frontr run the Fed. So, they give us our short-term inflation expectations. The 2-year note has been reaching 52- week highs this year considerably. Even when Kevin Worsh has been opening his mouth, we hit a new 52- week high on the two two-year note >> because everyone's convinced, I think, at least it's on the table. But people are convinced that rates are going higher. And I don't think they're going higher right away. I don't think they're going lower. I think they're going to stay steady. But people are really concerned now that rates going to go higher. >> Well, I think it depends on where you're looking on the curve and what time frame. It looks like rates are going to go higher on the short term, but lower maybe in the medium, and then a little bit higher on the long term because of fiscal deficits is the way I'm going to put that, >> right? >> Yeah. But, uh, I do think there's a wary of short-term inflation expectations, but we've just have to look at the data and that it adjusts. But, it's the reaction of the market that matters, which I'm pointing to the 2-year note. I think it's the most important factor to watch right now. >> There are a couple of guys out there, and I think Tom Lee from Funstr is one of them who's got an 8,000 S&P target by year end, which I think is a little bit aggressive. I was in this 75 7600 ring, which is about right where we are. And if we end there, you're right, then we go sideways, right? Um, but there's someone else. I don't know if it's Bank of America or Morgan Stanley, but somebody also has an 800 an 8,000 uh S&P target. So, Phil, give me your sense of where we are and where we're going. >> I think I'm a little more optimistic than maybe both of you. I think 8,000 is very uh within range. I don't think that's a extreme call by any means. And if you look at what's happened with uh the geopolitical conflict, the Iran conflict, and even liberation day last year, retail is going in buying every single dip and they have been rewarded on every single occasion. So, I don't see how any near-term pullback that won't happen again. And I think that retail will continue to be right to buy every single dip. And then also, if you look at the worsh regime, >> yeah, people think that, okay, maybe rates are going up. I don't know. That's what the market is suggesting right now. I've been saying for the last few months that I still think we're going to get at least one cut before the end of the year, which is pretty contrarian. >> It is contrarian, >> but he was put there to effectively do that. And I know he's got to convince other people on the committee, and he has to also earn his credibility, but I think that it's not that uh tail risk of an event for a rate cut this year, which will I think be pretty good for stocks. >> Well, but let me ask a question. If he if he forces a rate cut, will people just certainly will the will the left accuse him of just placating to Trump because that's what they'll do if they force is a rate cut? I don't think the market's yet calling for a rate cut. I agree with you. I think the next move will be lower versus up, but they I don't think that's going to be till next year. >> I think most people don't think it's going to happen this year. I'm very out of consensus on this and there's a very good chance I'm wrong. >> I think Bank America somebody's got three rate cuts priced into this year. I don't know if it's Bank of America or Morgan Stanley, but somebody's got three cuts into this year, which means that's a lot. That's a lot. Yeah. Look, there's going to be nothing next week at the end of the month, right? There's no cut there. There's no meeting in August. And then September, you're only five weeks ahead of the midterm election. It would be very interesting for the Fed to make a move five weeks ahead of an election without being called partisan. >> I think there has to be data to support it. Okay? >> As long as there's data to support it, then that's absolutely fine. >> Okay? But and this we got three months, right? because we're going to get CPI and PPI. We're going to get PCE in July. You're going to have it again in August. And you're going to have CPI and PPI before the Fed meeting in September. So, I would agree with you. If the data supports it, you can then justify it. But if the data is kind of on the edge, I think it's going to be very difficult to justify. >> Well, here's an interesting variable. If we're getting 3.8% inflation about that, we're coming off the greatest oil shock maybe ever and CPI is only at 3.8. I I think people expected that to go along higher and it hasn't. So I think that's kind of a bullish case for why rates wouldn't go up certainly, but maybe even they could go down. I >> I I think Elizabeth Warren is frustrated that it's not going high. I should love to see it take off, but it's not going there, right? Or at least it's not going there yet. In fact, I think the CPI month over month is supposed to be negative this month. >> It is >> the negative.1 uh 0 point a tenth of a percent. >> It's supposed to be um that's going to be reported tomorrow. Oh, this is filmed on Monday and released on Wednesday. So, we'll have that data episode is out. >> Right. Right. It's going to be very interesting to see how the market reacts to that. >> Right. >> Go ahead. >> Oh, well, I I think that if the inflation comes in at about 3.8%, which is what I think is forecasting, there's going to be almost no market reaction because every surprise to the upside. you know, the bad news is essentially uh taken well by the market at almost every occasion in the last year and a half or so. >> Yeah, >> I agree with them. >> Yeah. All right. So, let's talk about this because this week starts the launch of earnings, right? Officially, last week we had Pepsi and Delta. It was very interesting. Pepsi disappointed and Delta crushed it. They're both talking about the consumer. Pepsi blamed it on the consumer and then Delta said, "No, the consumer is fine because they're traveling everywhere." Which, by the way, I think is true. every you go to the airports the planes are full airports are full you go traveling around there are Americans everywhere whether in Europe or just traveling around the country um so it's very interesting but this week is going to start that official season so that's going to bring us into the AI trade because everyone's going to be looking at you know all the chip makers the software makers the memory makers the hyperscalers all looking for uh in my mind a reason to sell them because they're priced to perfection I think and people keep saying can it get any better from here. I mean, look what they did to Samsung a couple of weeks ago. They crushed it and they sold the stock. MU the week before that. They crushed it and they sold the stock, right? So, let's talk about that for a minute and then let's talk about whether or not you think we're in a bubble because I don't think we are. But, go ahead. >> Well, let me preface this. I do not think we're in an artificial intelligence bubble. We we were talking about that pre-show and we can we can get into that again >> and we should, by the way, because that was a great conversation. >> Yes, it was. Um, but the bar is set really high this earning season. valuations relatively are high, but if we go into technology, they're very, very attractive, >> right? All the reason that if there's one little thing that they find that doesn't look right, they're going to sell them. >> Well, and I think it's forward guidance. And so, this is where we are going into this with headline risk, we're going into this with inflation risk. And if we don't have positive forward guidance, I think that's going to be the the scary part of earning season where the market will not reward it. However, if we look at the S&P 500, it's expecting over 20% earnings growth. If you look at the S&P 500 growth index, drill down into information technology, it's 61%. So, to your point, artificial intelligence, that information technology is what's driving earnings growth on the S&P 500. And I think that will continue. I like the investment that's happening. >> I'm I'm all with you. I think 100%. Do I think valuations are stretched? I think some of them are stretched, but stretch doesn't necessarily mean it's a bubble. >> I agree with that. Contrarian pick take as well, and I'm liking the theme today. Uh I think we look at valuations uh too much by a playbook and not necessarily how they inherently work. Right? When we're looking at PE ratios, we're looking at price relative to expected earnings per share. Expected earnings per share has increased higher >> relative to the price. So regardless if it's a lower or a higher PE ratio, I want to look at the delta differentiation, right? And that right now is screaming earnings have increased much more than price has, which thus makes it attractive in my view. >> And I would agree with you. Go ahead. >> Well, I I think what's interesting right now, we have these two conflicting narratives in the earnings story. You have tech driving most of the earnings growth, which is I think great and that's what we expect to see because tech is >> concentrated though. M >> so it's concentrated on the earnings side but then if you look at the equal weight S&P it's outperforming the market cap weighted S&P which means on a price action basis it's actually a pretty healthy bull market as they say and there's been a rotation and tech is not actually the mega outperformers you would expect >> let me just clarify one thing just so the audience understands when he talks about the equal weight S&P that's because the S&P is a market capitalization index so the so the bigger companies have a bigger influence when you do the equal weight you take it everyone has the same influence. So therefore, you get a better read on the broader market action versus concentrated tech. So when you say the S the S&B Eagle is outperforming, in fact, it is. I think it's up 12 or 13% versus the SB's up nine or nine and a half. >> Yeah, that's exactly right. And I I think that conflict in earnings expectations and equal weight performance, that's going to come to fruition at some point and one side's going to be more right than the other. And I think that's going to be really interesting to watch. Um, but for me, if you look at the last, I don't know, 10 12 years, earnings usually beat by about six to 7%. Yeah. And we're expected at 23% for the second quarter compared to last year. So, we could be at 30% earnings growth if we get the historical average of beat, which would be pretty insane, actually. And my sense is that you don't see 30% growth year-over-year when a bull market is ending. So, that makes me pretty optimistic for the coming quarters. >> I agree with that completely. But do you think that means the bar is set so high that market participants aren't going to reward them if they aren't exceedingly well like we saw with Micron? That's my concern, >> right? >> There's probably a near-term price action risk if the bar is set very high and even if they hit it, then it sells off anyway. But at the same time, that should make it a pretty good buy the dip opportunity. >> Agreed. But I think the conversation was, you know, they crushed it with Samsung or MU, but they the guidance it was great, but it wasn't great enough. I go, how much greater do you want it to be, right? But that's going to be the argument, I think, this quarter is they're going to look at the guidance, they're going to say, but it could have been better, right, for the reason to sell it off. But to your both your points, I think if it does, I think it's a big opportunity for a long-term investor, right? Because a day trader, a day trader wants the noise because that's how they make their money. They're trading the noise. But a long-term investor is looking for opportunity. >> Well, and I think as market participants, we tend to also forget the environment. You could have wonderful earnings, but you have an environment with headline risk uncertainty increasing with inflation expectations due to the geopolitical tension leading into that headline risk. And so oftent times you'll see Nvidia selling off in sympathy when there was no reason for that to happen. And so it it it is expectations and how markets feel about it, but it's also considering the environment that these stocks are in. And once that shifts, then we're going to start seeing seeing some headwinds. And then I I'll I'll be on board with you, Phil, and maybe we'll go a little higher out of that out of my trading range. [laughter] >> I don't know. I'm Do you have a range? Do you have an S&P year-end target? >> Um I do not have a year-end target. I don't like calling in targets, but I do I look at the market as of a if this then that statement. And right now my major if this is if the 2-year finally comes down instead of making consistent 52 week highs. And it's not that it's elevated that it's the problem. We can have an elevated 2-year note without the market falling. It's when it keeps making newer highs, right? And that's that seems to be the biggest push and pull that I'm observing at least from a price action perspective. >> Do you think um that a return and you probably I don't know where you were when Alan Green was Fed chairman. I'm assuming you weren't in the business at that point. Let's just put it that way. But he was, you know, I was I was 20 years old when Alan Greenspan was the Fed chair, right? Um, and it was a Fed that was very strict in the sense that he was the one who made the comments and he came out, he made his announcement and he walked away. He didn't sit there and hold your hand and say, "Oh, come lie down on the couch and let's take a Xanax and let's talk about it." Uh, uh-uh. Not not what he did. He came out, he said, "This is what we're doing. You figure it out." And he walked away. >> Sure. I think Kevin Walsh wants to bring it back to that. He's trying to get the he's trying to get the FOMC members not to do the media circuit after the FOMC meeting because it creates chaos because you have one opinion, you have a different opinion. He's the Fed chair coming out saying this is what we did, but then there's all this internal strife that everyone's talking about. I actually think that's a positive thing that he wants to draw pull it back. >> I agree with that. I mean, I'm pretty old school in the sense that uh not that I was around for >> a young man, you're old school. Yes. And and I I think Wor's instinct is right that we should probably be talking less about what's coming. And I don't think it's the Fed's job be forecasting publicly. Maybe internally they can do their own models, >> then they get backed into a corner and that's the problem with the market because they say something and the market tries to hold it to them. >> I I think that's right. And uh and then I'll let you go, Jess. Uh the one thing I'm watching that I'm more concerned about with the Wars Fed is these committees he's launched. I know he has five uh committees that are going to do investigations into various >> internal reviews >> which I think on principle it's good but generally especially in the government committees is where initiative goes to die. So anything that he's going to put forth to the committee's responsibility they're probably going to play the blame game in some capacity and then nothing nothing's going to get done. >> So that that's my concern about wares. >> I think it's a great perspective the the task force. Um, I I do like the pressers and I do think it's interesting. There has been so many shifts and changes since the great financial crisis with our liquidity system and the way that the Fed translates data to us. Is it a little excessive? Absolutely. The market hates uncertainty. If it's creating additional uncertainty, that's where there's a problem. That's right. Now, Powell, it was where we had those press conferences only when an interest rate decision was made. Powell gave us press conferences every time the Fed committee exactly. >> And I loved that though because Powell, if you listened very carefully, he would give you a sentence every time that would tell you exactly what you needed to look at in the market to understand where the Fed's head. >> Okay, but there were 50 people in the room and you hear it's blue and you hear it's black, right? That you hear two different things. He says the same thing, but yet you heard something different than you heard. >> Well, that's what makes a market. >> I understand. But that also then creates chaos and uncertainty for the market, which you know, okay, I get it. But >> I think less of that is better actually. >> I I would love to keep the press conferences if we have less of the Fed speaking consistently throughout the week. >> They hit the media. >> Yeah, that that we can certainly take back on. Um he doesn't want to give any forward guidance, but I do think it's interesting that he wants to look at the forward impacts of artificial intelligence. And to me, is that rather contradictory because that is looking to the future. >> Okay. Well, listen, which which which which is a great segue into this next conversation because we we were enjoying it before this show and I really think actually we should talk about it and it's a question are we in that AI bubble right now? I'm in the camp that we are not I'm in the camp that this we are in an industrial revolution because it's changing the world separate from the dot era which is where you and I disagree a little bit. So talk to talk tell let's talk about why your perspective. Um I do think it is not a bubble. We are absolutely in another industrial revolution. I think if we study revolutions going back to steam even it is compounding. >> That's important to to keep in mind. >> It is very different. I do think where our argument was coming in is I do think the dot era was absolutely an industrial revolution because it gave gave us access to data. Okay. >> Which was imperative to what we need now. So I think that was the era of accessibility where you could look up anything good or bad. There's always pros and cons. Agreed. >> And now we're in this era of data curation and expert oversight and that leads to artificial intelligence and automation and the productivity increases that we saw as a result of the dotcom era. >> I think are compounded and even higher now. >> Well, okay. I would agree with you that. I just don't see it. Look, I lived through that dot bubble, right? I mean, I was actively employed in the industry during that.com bubble. Um, it was certainly a change. Uh, but I don't regard that as an I didn't, as I look back on it now, I wouldn't say that that was a an industrial revolution. I think this is an industrial revolution because it's changing the world in ways that we couldn't imagine. The docom bubble, and it was a bubble. >> It was >> um uh was just, you know, it was it was about access to the internet. And to your point, yes, you could get data, you could look stuff up. I I agree. But I think this is a revolution much different. I think the companies we're talking about today are real companies with real earnings that are changing the world. >> I don't think Pets.com did anything to change the world. >> No, they didn't. And and which led to their demise and exactly >> RIP the sock puppet. >> Exactly. [laughter] I think the soft easiest comparison to make is just look at the earnings today versus earnings.com and then you can kind of end the debate there. And to me that's uh that's as simple as it gets. Um but the the thing that I think is more interesting is the trillion bucks in capex that we're getting for this AI buildout. There are very wide ranging economic implications of that. And I think uh you know I've heard people say well it's very inflationary that we're getting all this spend into the infrastructure buildout. So that's kind of an interesting economic variable. But then on the other hand, if all of that stopped, the economy would slow down dramatically. >> I don't see as inflationary at all. >> Okay, tell me more. >> I I I think it's just part of this new revolution that we're in. You need this infrastructure for this revolution to happen. And so I think it's a positive. >> I think to split the spread here, fun little finance joke, [laughter] we it's short-term inflationary, long-term deinflationary is the way that I see it. And another contradictory view, I really like the contrarian theme we have today going on uh is we just left this era postgra financial crisis where we're rewarding companies for stock buybacks because that's what they did with their cash. They are mathematically that helps PE ratios and EPS calculations. >> You don't want tech companies to invest for growth opportunities. >> Of course you do. >> I'm very happy about that. But I think it's a common market playbook and that's what happens a lot with market participants is this happened and then this happened so therefore that will happen again and I worst statement you can say this time is different but this time is different so [laughter] >> this time it's different that is not right not the statement you want to be because because uh uh >> is it really different that'll be the conversation right >> but these are bigger companies >> that's right >> even SpaceX as an IPO is technically a 25year-old company it's more mature. That's right. They're not there are more regulation requirements to even all the liquidity needs were sucked up by venture capital and PE and so now it's more mature companies that are coming to the market, >> right? >> And to Phil's point, real earnings and I'd like and that's justified by the spend that we're seeing and I would rather see spend. Yes, cash buybacks are absolutely great, but for growth tech opportunities, I want to see spend in that area. So, do you think that uh whether Open AI is even coming? Do you think it's even coming this year? I don't think it's coming this year. I think they put it off. >> Probably next year. >> This whole Apple thing, this whole Apple headline is going to be very interesting. >> That's a big curve ball. >> Yeah, it's going to be very interesting. But one way the other, whether it's Open AI or some other tech company that comes to the surface, what I don't see is a lack of demand. I mean, look at SKHEX. That was seven times overs subscribed. Look at what happened to SpaceX, right? It was multi-overs subscribed. Um, and so the money's coming, you know, there's this rotation, I think, in the market that people are taking some money out of high performers to reallocate it to this new area of tech. Do you agree? >> Yes, I think that's true. And I think the Mag 7 have seen a lot of the outflows over the last few months and they're going into something like SKH or or Micron. And I I think the other maybe retail view on this would be, okay, I've let Google or Nvidia run for 2 years now and made a killing on it. So next time they crush earnings, I'm just going to take profits, >> right? >> And I think that's going to continue at that uh pattern because why, you know, if you get 100 200% profits, sometimes 500% profits you're in micron, how much more are you really going to get versus where can you deploy that elsewhere, >> right? But you're talking about I'm assuming you're talking about the retail investor that's going to take that money off the table. >> Yeah. I think >> because the big institutions are never going to completely take the money off the table in a name. may they may cut a position in Google or Apple or Nvidia, but they're never taking all that money off the table. And nor would I suggest as even as a long-term retail investor that you should take it all off the table. You can trim it. >> Sure. >> But especially if you're in and you're in at a good price, you know what I mean? That you could trim, but I would never say to anybody as long as the story, the fundamental story has not changed, there would be no reason to toss it out completely. Well, I think one red flag on the uh the memory side and I I've been very bullish memory. I've been in Micron. I've been in South Korea for almost two years and uh seeing headlines that South Korean retail investors are putting money into stocks based on loans that they're taking out to buy stocks. >> That feels a little toppy, right? And um so that at one point when I saw those headlines, I did trim some positions myself even though I believe in the story, >> right? But that speaks to stretch the valuations are stretched a little bit. doesn't speak to it's going to blow up, >> right? It's not going to be a this bubble that's going to blow up. >> I think it could be bubbly in South Korea specifically. >> Okay. It's >> because in if we look at every bubble, the one common factor is leverage and extended credit, >> right? Okay. >> And what we're seeing is the activity happening overnight, it bleeds into our futures and then we normalize once we get to US markets open. But there is some bleed over in the US markets with products that are coming on. SpaceX had IPOed the very next business day that Monday there were 10 new products. Seven were leveraged, three were inversed. And if we look at the market mechanics of these, it accelerates and creates volatility. >> 100% both on the upside and downside. Yes, agreed. Listen, this half an hour went by way too fast. You have to come back because we have to continue this conversation because we're out of time. Um, but I know you two are you two are you're going to be on his podcast in uh in just a couple of hours. So, uh, you know, our listeners can watch that as well. But I thought this was a great conversation. I'm sorry we ran out of time and I'd like you to come back so we can finish it at some point. Until the next time, take good care. >> [music]