AI CapEx fears: Is big tech overspending?

Hello and [music] welcome back to Trader Talk at Yahoo Finance. I am Kenny Pulcari and today we're talking to Christina Hubu 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 lot going on. So, let's just get to it because we're in the middle of earning season. This is a big week, certainly a big tech week, but we're going to get about 150 names that are going to 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. >> 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. So it'll pull down the growth rate. Right now, I think they said they're growing at about 15 or 17 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. What do you think? >> Yeah, I think we're going to have uh some very good reports from earning numbers. I think the capex spending on the tech side has been worrisome for some investors. I think Google coming out with more capex than they have cash flow is something that just worried a lot of people. First time ever, by the way, that they had negative cash flow, >> right? >> Absolutely. So, I, 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, >> do you think um do you think the AI trade is over by any stretch of the word? >> I don't think it is. I think the uh the kind of habit 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 going to have some stratification. There's going to be some companies that are going to execute a lot better. There's going to 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 two or 300% are going to drop a lot and I think we're going to continue to have pullbacks along the way in the whole sector. >> 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 telos of the late 1990s, early 2000s, there's a lot that rhymes, right? >> Uh and so I do worry in particular about hyperscalers because they have an enormous hurdle they need to meet. Bane came out and and forecast that they need to get to 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 >> is that a stretch? >> 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 hyperscalers are spending so much, right? 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, >> right? 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 going to 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 bath water because I don't 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 and it's proven to bounce off that 350 level now. It's trading at foreign change, I think, isn't it? Well, yeah. And I think what's happening is investors are becoming more discerning and they're also re-evaluating 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 flows 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 >> right >> that's changed now I think the greater risk is to overspend in this environment especially if one needs to borrow to do it >> well at what point are you overspending look Google just came out and said that they raised their number to 205 billion >> right >> and you have token usage by corporations what up a thousand% right year to date so I mean I I think we're just at the beginning of figuring about what we can do with this whole new universe of of >> but 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. >> Yes. 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 uh GPUs are created. So there's a real risk in throwing in a lot of money right now as opposed to being uh more uh more careful more thoughtful about spending. >> Right? Which is why I think um when 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 catchup and buy it. But I'm certainly not chasing it. Like look at Apple and I love Apple, but it's tra alltime highs. I'm not buying Apple up here at all just because why would I? We own it already. Why would I be buying it way up here when I'd buy it on a 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 re-evaluated as the more traditional Apple company now? >> Right. Well, let's see what they say on Thursday. It's going to 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 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 right 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. >> And I think a lot is riding on AWS. So So I think that's that's going to be critical, especially the for forward guidance around it. >> 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? >> I do. Absolutely. The consumer is very weak right now. I obviously'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 has it. >> That's interesting. I have never heard it defined as a as a P-shaped economy. we should start that because the K shape is what everyone's been talking about >> and and income is not to me as important as assets, >> right? >> Because uh 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 a a 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. >> Yeah. But let me ask you a question. Consumer staples on the other hand are things that people have to buy every day whether that 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 staples, right? >> 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. Um 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 you know the the stores the the this part of that industry that is that's largely about you know high netw worth uh shoppers uh clients that's going to be okay but it's the vast majority of households um below that that are really suffering stress. >> Do you have the same 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's 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 >> yeah. No, I don't disagree either. >> Yeah, I I I agree. If if the price of oil can come down, but look, that's the frustrating thing because a month ago, we all thought this was science seal was over, right? That everyone was going to play nice in the sandbox and we were going to 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 mid90s, 94, maybe 93. Um, and today it's down because because, you know, we have supposedly another deal. But I wonder, do we really have another deal yet or are we going to are we going to be on the edge of the seat waiting? >> Well, 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. >> Correct. >> We're finding that even getting a memorandum of of understanding that we can stick to is a really difficult uh thing to accomplish. So, I think that >> we're very likely to have continued elevated prices, continued conflict in the Middle East for some time. >> Right. Do you do you think >> I 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 and >> that's the question are they look they're well aware that Trump'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. Well, >> I think if uh if the Democrats win, I mean, I think they're going to rein him in rather quickly, >> 100%. Or they'll try. >> They'll try, >> right? 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's in the back of their mind that this is all going on. And look, we're only three months out now really from the from the election, right? And so now it's going to get even more um potentially more volatile as you start to kind of really get a sense of which way it's going to 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? >> 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 >> think more pressure on the market if that happened. >> I think there would be. Yeah. >> What do you 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 actually surprised at how well the stock market has held up in this environment. >> We've thrown everything at the stock market and the S&P is up what 9% the equal weight is up nearly 12%. >> And it it tends to rally when we get good news about uh the conflict in the Middle East. Even though it's nothing permanent, doesn't really go down as much when we get negative news. It's bizarre, but it's this gravitational pull upward that's really been surprising to me. I think it's all about earnings growth, of course, right? Um but I think that there could easily be um some kind of ranch thrown into this. I think it most likely will come from higher yields. >> Okay, so let's talk about that. Let's talk about the Fed and Kevin Worsh 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 is where 20 where you're getting these higher yields that he can't seem to control. So what do you think happens next? Well, first let me just say that, 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 lock step and it started going up. Yeah. 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. Right. >> 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. Right. >> And so so I think 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 C CME Fed watch tool. It was you know >> Yeah. But I still don't think rates going up in July. the September rate expectations likely 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 going to be a hike in September. >> Yeah. >> Which is going to be interesting. >> 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, right? Um, I mean, my initial thought was this guy was brought in to cut rates, but only three of the the Fed members were nominated by Trump at this point. >> Yeah, but he can't just cut, let's be clear, it's majority rule. Exactly. Like, 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. >> And he's actually talking these days like he wants to raise rates. He's I'm very surprised by what he's saying to be honest. >> But do you think he's jawboning? I 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, >> but think about this. Think about the amount of issuance that's coming to the market. Mhm. >> That's only going to absorb, you know, buyers of that debt are going to demand higher yields because there's a lot coming. >> Exactly. >> Right. So, so they're going to bid lower and so prices will go down, yields will go up. >> There are many forces conspiring to drive up rates on the long end. >> Exactly. Right. And he can't do anything about that if he's bringing all this supply to the market. Correct. >> That's correct. >> Yeah. So, that's going to be, you know, there's a little bit of a conundrum there for him and for the for investors. And the interesting thing is what else is he going to 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 Spanish. >> Yeah. >> Which, by the way, I think is great. I would love if he if on Wednesday he just said, "Here's what we did." And he turned around, 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 okay 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 people forget that. I mean, I think that there was a big push for more transparency or >> during the great 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. The radical transparency of the Powell years is done. Yeah. Uh but I think that's going to be very hard because once you give markets something, it is hard to take it away. >> Agreed. A >> 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 >> no >> regime when that didn't happen. I came into this 1980 when right when Al >> when you're looking at the size of his briefcase to figure out what he's doing right >> to figure out what he was going to 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 Worsh 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. >> Well, it creates a lot of additional messaging. It creates messaging that might not be part of the majority >> 100%. Which is which is which is what was happening because you get the people that came out desending saying why they descended and you know and then the other people that came out in 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. Well, I you 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 is making a more compelling argument than others. >> Okay, that's fair enough. And I think I think that information can make its way into the market. I think um >> I worry that it's not consistent I guess is is but 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 a more often >> kind of schedule maybe. Which by the way, they're going to do away with the dot. I'm sure that's going to be thrown out, >> 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 [laughter] ridiculous when you think about it. But >> well, he's doing away with that >> to get, you know, any little bit of information, any color can be helpful, even though we know that it has been grossly inaccurate in the past. I mean, we go back to December 2021 dot plot, right? They anticipated something like 90 basis points in 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. >> Yes. But I think over 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 going to 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 7576 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 8,000 which I think are fairly aggressive, but tell me what you think. >> I don't love to put a number on it. I think trying to pick the 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 riskon 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, what flipped? Did something Did something happen? >> I don't really know. I don't really know. Oil is still down which makes sense. Um but there is the the same pullback on my >> NASDAQ that's under pressure again. >> Yeah, it's it's the chip names. It's you know part of part of the problem is that we are seeing credit spreads widen for the hyperscalers and I think that's exerting pressure right now and and um you know sometimes it just takes time for investors to get uh more nervous. >> 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. And while I think it's true, I think there's a little bit I think they're going to push it one more time just to test it to see who gets anxious and, you know, does it hold or does it melt, it's going to be interesting to see what happens over the next couple of weeks, right? This week will certainly be a big week. 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. Highix is still fairly cheap if you can figure out how to trade it with the premium. >> Micron's on sale. It was trading at 1,200 just a month ago. >> Yeah. >> Right. But wait, before we go, I ask you one question. IBM, tell me what you think. >> I like IBM. >> Do you? Okay. 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 chat, 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 that level. >> Well, 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 high. >> Yes. But that happened one day. And And so, so do you like IBM? You don't like IBM? >> 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 >> Perfect. >> Yeah. >> Well, I can't comment on individual stocks, but what I can but I didn't answer your question about the S&P 500. First 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 selloff 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. >> Ah 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. that 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 you know how it all turned out as we discuss it. In any event until next week, take good care.