NVDA Earnings & Fed Opening Door to Deeper 2H 2026 Volatility

there. That's Jenny Horne, the co-host of Next Gen Investing here on the network. Do you want to broaden out our conversation, though? Bring in our next guest. Joining us, Paul Schatz, president and chief investment officer at Heritage Capital. Paul, great to have you on here. Now, I know we've talked in the past about your outlook for 26. You were anticipating a 10% correction in the third quarter. We're now about 60% of the way through here. We haven't gotten that 10% correction yet. So what has to happen over the next six ish weeks for that to come to fruition? Good morning. Always good to be with you. So right, my thesis coming into the year was we would have a small pullback in Q1. It turned out to be just ten almost 10%. And then new highs by July 4th. And then we'd have another decline in Q3. I don't have high conviction right now that this is it right here. But I would say this to me, the risk is in the next 5 or 6 weeks, that's where you're going to have pre announcement season. You're going to have some some seasonal headwinds. And look in the short term the market's not trading well. You've got the number of stocks making new lows. This kind of sort of rising and new highs are okay. You've got what most people refer to as a split market the haves and the have nots. So you add those together in this time of year and going down 5 or 6 to 10% from the highs by early October, it would be super healthy. And that would cause me to believe we've got a double digit rally into the new year. So that's our thesis. And look, if I'm wrong, we don't get this pullback. I still think we go higher into the new year. I just think it will be more of a drift than a rocket. Okay. So you mentioned some of the stocks. We have more stocks a bigger proportion of stocks making new lows here. We have some weaker market internals. So how concerned are you about the headline S&P 500 masking deterioration underneath the surface. And look so you just kind of stole my thunder. That's what normally happens before you have a pullback or decline. A more serious decline like this is we're not there right now. But like, you know, the.com bubble markets started deteriorating internally in May of 98. So it was almost two years early. But what normally happens is you get an index masking strength when you know the if it's a war analogy, when the troops have all left or died and the generals are left standing, this is not some bull market peak and we're going down. This is a normal routine, healthy. Reset the table for a run to 8000 above on the S&P. But you're right. This is what happens. The index masks underlying weakness. So then what's our catalyst in either direction. Paul. What's the thing that makes us either see this correction that's a part of your thesis or the alternative. We don't rock it higher, but we do consistently move higher through the end of the year. You know, people always say to me, why do you give time and price? Give one or the other? So you can kind of sort of be right? And I say, I don't mind giving both. And the and so my weakness is I don't know what the catalyst will be. You know, Nvidia's trading poorly into earnings. I'd rather see Nvidia rocket into earnings and then sell off afterwards. I don't think that's going to be the case. Could it be worse on Friday. Yeah. But I don't think you know it's worse going to really do anything earth shattering. I don't think so. Could we have a little bit of volatility based on that. Yeah. So the answer is it's usually out of left field. It's usually things that I'm not paying attention to. And that's okay. To your point. What happens if we don't look if we get to, you know, early October without any kind of tradable weakness, which I would define very easily as more than 5%, I think the window of opportunity for a decline, a reasonable decline of 10% through January will have closed. And and the stock market will, will drift higher. We'll get we'll get through, you know, Q3 earnings season in October and things should be fine. But I, I never worry about what's going to cause it just that right now, the storm clouds are there for a routine, you know, five, 6 to 10% decline in the next 5 or 6 weeks. And you mentioned Nvidia there. And of course, with it being tomorrow, we have to talk about this. You said you don't expect them to have a run up into earnings or a sell off afterwards. I want to ask about that second part, because as I was looking back in my prep for Nvidia earnings this week, seven of the eight last quarters, if I looked a month out post earnings and all of those earnings arguably had good numbers, they were still lower on the month. Six of those eight days after the report they were lower. So what does Nvidia have to say Paul, for the market to react against the trend that's not working in its favor right now. So clearly you've done your homework. What I like to see with high fliers is I'd like to see them sell off into into earnings. So Nvidia today Nvidia has been down roughly seven seven straight days or so. I like to see sentiment as little negative on Nvidia. You hear people do the but everything's not perfect and everything is not rosy. So this is a good setup. I'm not saying they're going to beat and things are going to rocket. I'm saying from a risk reward basis you like to see when the high fliers sell off into earnings, when Nvidia rallies into earnings and sometimes pops on earnings. To me anyway, that's a sign to pare back our position. I do like how it's trading into earnings at its lower. And people are tempering their expectations. What they have to say. Look long ago I said with Nvidia I, I cannot believe some of the earnings reactions. So I'm not going to opine and tell you what they should say. I think the fact that they're selling off tells you sentiment's weak. And the risk reward favors the upside post earnings. All right I like that. And you say right now you're staying away from semis. You're staying away from some of these sexy high flier names until you get that pullback. So who do you like right now Paul. I like a lot. When I was making my list this morning. There's a lot of stocks I like. You know software. That whole AI thing is so overblown. And software software really differentiated itself. So there's some really good haves in software. Some of the ones that are that are beaten down, like, you know, Tyler Tech, which is really public sector technology. They are the dominant player. They were growing at kind of like at a hyper rate, growing as slowed. But they did beat recently on EPS. The stock's always expensive. That's okay. I'm all right with that. Earnings aren't until the I think the end of October. And I think this one trades above 400. Palo Alto. You get CrowdStrike tomorrow. They trade in tandem. We own Palo Alto. And we own bug the ETF which is also in that space. You know Palo Alto CrowdStrike there industry standards in cybersecurity. To me it's the it's the safe. It's a safer and quote choice. Great balance sheet, great cash flow, great pricing power, great growth, earnings worries, I think are overblown. And I think that one is weakened earnings like Nvidia. I think you could surprise the upside on CrowdStrike. And then and look we started building positions in staples. Boring stodgy yucky dividend paying staples just like I did with pharma starting in the in early July of 2024, I gave. So Kimberly-Clark and Cal-maine foods, Kimberly-Clark. Most people know as a diaper maker, the headwind of higher oil prices going straight up because they use oil as part of their energy, as part of their input costs. That's past 5%. Free cash flow, 54 straight years of dividend increases. The can view mergers a little noisy, short term, long term, it's going to be great. I think this is a low lower risk smart play. And then Cal-maine foods no surprise. You know eggs are are in vogue. It's the largest egg supplier in the United States. Also similar to Kimberly. It's got free cash flow I think 9%. Really good balance sheet, low debt, high liquidity. Their their dividend is unusual. Its quarterly based on a 33% of the earnings. So it's not when you look at it, it's like, wow, it's almost 6%. That will change quarter to quarter. But EPS end of September. You don't have to worry about that. Another one I'm building positions in software and consumer. And then once we get to end of September, I'm going to go hard into consumer kinds of retail stocks. So that's kind of my thesis right now through year end. All right. SaaS isn't dead. Defensive names are in favor. And we're looking at the consumer in the fall. Paul really appreciate you being with us. Always