Forget the AI hype. Buy the infrastructure.

Welcome back to Trader Talk here at Yahoo Finance. I am Kenny Pulcari, your host. And today we're talking to Kevin Man who's a CIO at Henyan and Walsh and we're talking to Willie Lee who is a principal at Neoellar >> Capital which has been renamed from Suro Capitals. Gentlemen, thank you very much for the conversation. There is a lot to talk about. The world has changed in the in the last in the first six months. It's going to change again over the next six months. There's a lot going on in terms of earning season and and the Fed and now we have renewed geopolitical tensions. But let's start with uh Kevin Walsh and the Fed. Let's talk about kind of where he's at because he's just announced this uh this these five new committees to kind of do some introspection in the Fed, kind of how it operates, why it operates the way it does. So talk about what you think that means not only for the Fed, but then what what's it mean for the investor? >> Sure. Uh, I keep going back and forth, Kenny. Whether he's a hawk in doves clothing or a dove in hawks clothing, I can't figure it out. What I do know is he's a reformer and he's going to change the way >> actually is not such a bad thing. >> It's going to be great for the market. He's going to change the way that they communicate. He's going to change the way that they operate and he's going to change the way that they collect data. Hopefully getting more accurate data to make their decisions based upon. So, I'm holding out hope that this is going to be good in the long run. you know, for you and I, and this is nothing against you, [laughter] but we were around during the Allen Greenspan. Same world, >> right? We're in the same world. So, we were around during the Allen Greenspan Fed. And so, for me, it's kind of like a takeback to what it was like. I mean, because look, when the great financial crisis happened, I get it. It was all this anxiety and nervousness around the world legitimately. And so, the Fed needed to change kind of the way they they spoke to the crowd, right? >> Yep. >> But I don't think they need to do that anymore. >> Transparency isn't a bad thing. Too much transparency is a bad thing. >> Yeah. It creates chaos and volatility for no for no reason, right? For correct unnecessary anyway. >> And specifically now of all times, I think right now there's just so many things going on almost true transparency where things are changing moment to moment can be I think difficult for the markets to digest in any given any given minute. But I think the other thing is that he's going to pull back on on how many of the members, you know, do the circuit. Yes. And go out there and talk about their own views, which I think creates lots of volatility and caps in the markets. >> Yeah, without a doubt. I mean, I think if you just take away the other voting members ability to speak, and I don't mean that in an overly >> No, right. >> punitive measure, but it creates confusion in the markets. If they only put out the dot plot chart, and I know everyone's against the dot plot chart, but at least we'd see where their views on interest rates are. When they add commentary, it confuses them. >> Wait, but aren't they getting rid of the dot plot chart? >> He didn't say that was a definite just yet. The task forces are looking at it. >> Yeah, but you know, but the dot plot, remember, that's literally you take a number two pencil and you draw part a dot on a graph on a piece of graph paper. >> That's what it is. When we talk about the dot plot, it's really a dot plot. And boy does the media run with those. Right. Right. And they interpret it and everybody like, you know, when he'd have the press conferences, you know, he'd sit there'd be 50 journalists in the room and he'd say the sky is blue and everybody heard something different, >> right? They never heard the same thing. And so therefore, it was always open to this interpretation and this is what he meant. That's not what he meant. >> Even his first meeting, they came out from that meeting saying he was more hawkish because nine voted for 125 basis point he hike. They forgot to mention that eight voted for nothing and one voted for >> because it didn't fit the narrative that they were trying to sell which look I get it but I think that the I think less is more in this case. >> I agree. Yeah. Absolutely 100% agree. >> Right. I think it's going to be I think less is more not only for kind of the Fed in terms of boxing themselves into a corner but I also think it's better for the market. Yes. >> Right. Because remember when Alan Greenspin used to come out Yes. and he'd make the announcement he stepped out behind the door he opened his folder. He said the Fed did this. He shut it and he walked away. Yes. >> He didn't sit there and hold your hand and >> take questions. >> Nothing. Zero. And the market had to figure it out. >> Yes. If Kevin War starts carrying around a briefcase though, I'm going to give you a little bit nervous. [laughter] >> I don't think we're going there. >> No, I don't think we're going there. But one way the other, which now leads us to, okay, where are we? Where are we? Because the market is now at least it's on the table that they're pricing in a potential rate hike. I think rate cuts are still on the table, but no one's really talking about them at the moment, right? I don't think we're going to get a hike, but I don't think we're gonna get a cut either. I think we we hold steady through the end of the year. >> Yeah, I'm in the same camp as you, Kenny. I don't think there's any movement with interest rates for the balance of the year unless the straight of Hormuz closes for an extended period of time. Barring that, we're kind of in a Goldilock state of the economy right now. But we don't need any interest rate activity. We don't need to look to the Federal Reserve for help. Do >> you agree? >> Yeah, I think it's going to hold it's going to hold flat for the rest of the year. I mean, you can see the dual mandate that they're trying to balance and they're pulling in two different directions. It just makes sense that you would hold it until you get more data that tells you otherwise. >> Well, it's interesting and I don't know who it is, Morgan Stanley or Bank of America. Somebody's calling for three rate cuts this year. And I think to myself, what are they smoking? Because I want some of it because I don't see one, never mind three. >> Yeah. >> Right. I mean, if you look at, again, these are their own forecasts, and perhaps the forecasts go away, but they still believe the economy is going to grow at 2% or more this year. They think the unemployment rate is going to stay relatively where it is right now, 4.2 to 4.3%. Yes, historically stays elevated, but they think it's going to come down. >> So, they don't need to cut interest rates, and they certainly don't need to raise interest rates right now. >> No, they don't. But I think the idea that the the the rate hike is on the table is actually I think that's a good thing, right? To leave it out there that it is a reality that you know rates aren't just going to keep going down down that there is a reality. Which leads me to one more thing because then I want to move on to the next to the next topic. But can Walsh force a rate cut? And if he does, how does the market take it? >> That's a good question. I mean Kenny, I think I don't know if he can force a rate cut. He can certainly push for it >> but I think the markets especially for where Neostellar invests especially in private markets along AI infrastructure spending in that area is not slowed down. People see ROI despite the volatility and cost of capital people are still deploying you know tens hundreds of billions of dollars against what they see as very high ROI opportunities. And so I don't think, you know, whether it's a rate cut, flat hike, you know, people are still operating on on the status quo of what's going on, >> right? And I would agree with you. And so therefore, I don't think I think he holds them steady. I think he leaves I think he leaves it out there, >> but I think he holds them steady. >> I mean, the last I checked, he's only one vote on the committee. There's 18 other votes. Does he have influence? Perhaps. Is he leaning more dovish? Perhaps. But right now, he's seeming pretty diplomatic and open-minded. >> Yeah. You know, is he leaning more dovish? Because yeah, he may want to cut on the short end, but then he wants to he wants to >> shrink the balance sheet. >> Shrink the balance sheet. >> You're right. >> Right. So So that's not that's not dovish. That's actually trying to maintain. Yeah. So you can say the front end is lower, but he's shrinking the balance sheet as well. >> And if he shrinks the balance sheet, that's means he sells longerdated bonds and that pushes up those yields. And that's not exactly what President Trump would want. So [laughter] >> which brings us to a whole another conversation, right? But let's not go there. Look, next up is earnings. They're on the table. They start this week in full force, right? We're going to get the banks. Okay. But really, I think what everyone's listening and waiting for, they want to know the hypers scales. They want to know the memory chip. They want to know the software stocks, the chip makers, the memory stocks. That's what they want to know because that's where, you know, kind of the focus is, right? It's all about this tech thing and are we in a bubble? We're not in a bubble. I don't think we're in a bubble. Do I think there are parts of the market that are stretched 100%. Do I think we'll start to see them sell off a little bit? We've already seen it, right? This rotation over the last month has come out. So talk to me from your perspective where you think the AI trade is in terms of bubble no bubble. >> Look, I think what we say on our end is just absolute demand for compute that is far outstripping the supply that any company can provide. I mean there's like I said tens hundreds of billions of dollars going in there. And I think what you saw in the beginning times with Nvidia when this started to ramp up is everybody taking a very close eye on Nvidia, seeing if their earnings were going to be good or bad or if they were going to miss. I I think what you're seeing is now like when people look at Nvidia, they kind of already know what's going to be said that they blew it out of the water. Demand outstrips supply and you're going to continue to probably see that into this earnings. Where I think people are starting to take a finer tooth comb is if you look at some of the mega spenders of like Amazon, Google, Meta, any of these guys, I think you're starting to see deviations in the performance. Like Google for example, 12 months has been great. But if you look at Microsoft, not as great. So I think you know people are starting to take nuance to what AI spend looks like and ROI looks like. Do you think Microsoft is down from 520 or something worth trading at 390 385 something like that? >> I think that's a screaming buy in it's Microsoft. >> Do you think Microsoft's going out of business? >> I don't think Microsoft's going out of business anytime at all. >> And do you think co-pilot will eventually cure some of its ills and be a widely accepted AI productivity tool? >> Well, I think it will be one of a handful of very >> quality productivity tools. I mean, I think so. I don't think Microsoft is going down without a fight and I don't think it's going down >> and they have so much more money to spend. >> Right. But so let's talk speaking of just that kind of theory. Let's talk about this open AI trade because now they've put that they've put that listing off I think until the new year and at first it was you know >> you're kind of scratching your head but then this headline came out about this whole Apple Yes. >> Uh this whole Apple uh uh >> accusation. Yes. So tell me what you think now about what does does it dampen does it dampen the whole AI thing or does it dampen the open AI? >> I think it dampens the possibility of an open AI IPO this year. >> Right. >> I think it may dampen the possibility for an anthropic IPO this year. >> Ah >> we also saw SpaceX >> we saw SKHENX have these tremendous IPOs valuation right >> and overs subscribed and now we're out of their stocks. Yeah, >> I still think both of those companies are good investments, right? More so with SKH Highix, but I think both of those two companies we just mentioned looked at that and said, "Well, maybe we'll wait. We'll take a wait and see approach and Open AI right now is tangling with Apple and we'll see where that lawsuit >> and so I have that that news just dropped out, right?" And so it's this accusation that they've stolen all this intellectual property from Apple. Is that about the headline? >> Yeah. Yeah. I think look if you look at the headline and I can't speak to you know how how valid or not valid the accusation is but I think it speaks to where Apple feels a little bit threatened right where if you look at Apple they've been very successful over the last 12 months believe over 50% up in over the last 12 months and they've you know missed this first leg of the AI trade in a lot of ways where they didn't invest a lot in compute they don't have their own large language model they, you know, on self-driving they're they're missing on wearables, on AI wearables, they're they're missing a little bit, too. And so, they've they sort of missed this first wave. And if you look at OpenAI, I mean, they and Google are probably the two that can really chip away at what Apple has really built as this huge barrier to entry to the consumer. But if you look at OpenAI, I mean, almost a billion or at a billion active users. I mean, they have the distribution to touch the consumers. is they have Johnny Ives who came from Apple, right? So I mean if I'm Apple and I'm seeing where I might feel threatened in the next 3 to 5 years, it it would be open AI. >> Okay. But if Open AI in fact stole intellectual property, that is an issue. >> Sure. Yeah. >> Right. Right. That that's an issue. And so therefore that whole idea that I think I think that that IPO is I think it's been based just on the headlines that it'll be it'll be a 2027 event. It's going to be interesting to see if how if there's if it loses interest, right? If people lose interest in that particular model because I don't think they're losing interest in the other ones at all. I >> agree. >> Right. I mean, it's clear because to your point, SpaceX and SKHX were so overs subscribed, >> right? And we'll continue now. They just added SpaceX to the NASDAQ 100 after, you know, after a month of trading. Yeah. Right. If if even a month of trading and but I think that was part of the deal, right, when they went to NASDAQ, that was part of the deal. >> Yeah. just and and I believe in the space trade, the returns are going to be out of this world, right? Pun intended. But if you look at SpaceX, I mean, they had an operating loss of $4 billion as recently as last year. And then you look at other spaceoriented companies, Redwire, you have Helmet Aerospace, G Aerospace, Solid Balance sheets, profits right? >> If you want to invest in space, there are companies that do it. You don't need to throw money at SpaceX now. Wait till they develop their business plan. But I said the same thing with Tesla and look what happened with Tesla. >> Yeah. But you know what? It's a it is exciting and it's Elon Musk, right? You're really betting on Elon. >> You're betting on Elon Musk, >> right? >> So, let's talk now about this earning season because like I said, we're going to start with the banks this week. It's expected I think topline's expected to grow about 20 or 23%. Revenue is going to grow 11%. Or at least that's the estimation, right? Um and so I think the market is and it's a high bar this this quarter, right? And I think the market is priced to perfection. And so I wouldn't be surprised at all if you're going to kind of see this sell the sell the news type of event. >> Yeah. >> Even if even if they come out with great news, look what they did in Samsung. Crushed it and they sold it. MU crushed it and they sold it, right? Not because it's a bad story, but because you had all these trader types saying, "Let me lock in some profits." Still, >> you didn't see I didn't see long-term investors blowing out, but you saw a lot of algorithmic and trading action. >> Yeah. I mean, look, I think you see a lot of investors who've made a lot of money on some of these names. And so, you know, if unless there's something that's even above and beyond what the expectation is. I think it makes sense that some people are taking some profits at this point. >> Take some. I wouldn't take them all. It's okay to take some off the table. I think the last thing people should do is blow out of it completely. I think that's a mistake. >> Yeah. I mean, sometimes in life, Kenny, our best isn't good enough. I think that's going to be the tail of this earning season. >> And that's I think you're right. >> More records and you're still going to get the sell offs and PMs like us are going to sit there and wait for it to come back to attractive levels and buy it. >> That's right. And I I think that's going to be it's because it's going to be very interesting. I'm I'm very anxious and I think I don't think necessarily it's going to happen like with the banks. It's going to it's going to be in the tech space. Any one of them, you know, software, the chip makers, the memory makers, the hyperscalers, right? I think that's where you're going to see that action because actually you've already over the last month you've kind of seen this rotation out, right? And I keep saying this in my note. I talk about rotation versus liquidation because if it was liquidation, they'd be selling everything and the kitchen sink. They throw it all out the window. They're not doing that, right? They're taking money out of one sector, but they're putting it into financials, healthcare, basic materials industrials. >> But if they start to question the infrastructure buildout, I think they're going to miss out on some tremendous opportunities. the MCORes, the ACOMs of the world, the the data centers themselves, the REITs like a digital realy, the cooling solutions, the verdives, the mod manufacturing because the money is still being spent, right? They're getting an ROI today whereas the hyperskalers won't get an ROI for years to come. So, if investors start to poke at that AI bubble and now look at the infrastructure side, >> all right, so >> I think they could be missing out, >> right? Okay, so here's the next question just to get it off the table. >> Is it a bubble? No, absolutely not. >> I agree with you. I'm just asking the question. >> I think I think what is happening and why you see these elevated prices for some of these assets where they're trading, you know, on future revenue is because everybody is trying to get a piece of the AI ROI, which is happening a lot in the private markets, which is what we're seeing. We're seeing companies effectively doubling, you know, ARR monthtomonth, right? So, if you're looking as an investor to say, hey, there's all this AI spend. Where is the revenue coming? And you don't seeing that in the public markets. You know, a lot of it is happening in the private markets with some of these companies that are trying to fill in the gaps of where the LLMs are are not taking profits there. So, >> what's interesting though, you can get that exposure with almost any company now. >> Sure. >> Yeah. >> The banks, healthcare names, you can get that that exposure. You kind of get it in a, you know, it's it's it it's kind of like a different derivative, but you're still getting that exposure. >> You can get that exposure, but you can't get the growth, >> right? >> And so, I think that's what everyone is craving. I think and that's why I think Google has done extremely well compared to a lot of the other the other folks. I think when you look at Google and their opportunity and they can you can argue whether or not they're the third best LLM or not, but they're clearly showing some signs where they can be a competitive LLM in the space and people see that as an opportunity to potentially get exposure to AI revenue or LLM revenue compared to, you know, a lot of other stocks out there. To your point though, Kelly, take a sector like the utility sector, big old boring utility stocks, right? And then I think about a company like American Electric Power stocks up over 20% year to date. They got a yield of 2 and a.5%. >> They supply electricity to 5 million customers in 11 different states. And one of the states is Virginia, the data center capital of the world. So they've become a backdoor play into the AF revolution without the volatility. >> Yeah. Right. Right. And it kind of in this big boring name, right? It's a utility >> utility stocks. No, I want to be in the AI trade. Well, guess what? The utilities are now part of the AI trade. That's the same group. I mean, every sector can be part of the AI trade. Just depends on which derivative, right? To your point, you know, some sectors give you more of direct access. Other sectors kind of give you that, you know, that back door entry like you know like uh through the utility play. Um, okay. So let's talk about uh the the rising geopolitical issues now that once again have come to the surface because you know then Iran's not playing nice in the sandbox uh and now wants to force his trade. I think a lot of it you know look the midterms are now four months away. Uh clearly they understand that uh they understand elevated gas prices is not going to be good for Trump. Yep. >> Um and so that's a potential issue. >> Yeah. I mean, look, I think there's a lot of geopolitical risk that's happening and it creates a lot of uncertainty, but I I just go back to what I was saying before of, you know, I think people are still investing as if it's status quo, right? And I think especially on the AI piece, people continue to invest their massive sums of money despite volatility and cost of capital because people see so much ROI in that opportunity, >> right? Yeah. I I I well I think they're going to see ROI long-term ROI like you and I right are in that long-term game correct as wealth managers right um I think you're right and when you see that pullback right if you see this kind of sell the news type of reaction in the market yes you know I I think for guys like us >> that's like a gift >> yeah and I think that investors maybe aren't even looking at the geopolitical situation I ran right now a status quo but it's over it may not be over today but it's going to be over so we don't want to be distracted by that. And I hate to use the term, but maybe the inflation that resulted from higher oil prices is transitory and that will be behind us. So, let's get back to focusing on earnings on the AI infrastructure buildout where all the money is being >> Well, look, I I hate to use the two, but I do think that the rise in oil prices is transitory. I mean, because it's directly tied to what's happening, right? We saw what happened two weeks ago. Oil was trading back at 67 >> and now it's back to 80 today, >> right? Is it back to 80? >> 80. Hit 80. Brent crude hit 80 before Brent crude WTI 75 75 right but but I think that's a once again I still think that's temporary but the problem is the longer the temporary goes on then the more unsettling >> that should be the headline for this segment [laughter] it just becomes more unsettling right um which is okay so before we before we uh tie this up because we're running out of time I just need to talk to you about the second half of the year just tell me uh just tell me where you think the second half of the takes us in terms of do you have a target for the S&P? I know like Tommy Lee at Fund Strat I think has an 8,000 target on the S&P which I think is a little bit rich. I'm in the 757600 which is right where we are. So that means as far as I'm concerned we're going to do this sideways action. >> Yeah. I mean if we do get to 8,000 what's that 6% from here. A little over 6%. That doesn't seem entirely unrealistic. >> But we're already up the S&P is already up 9 and a half% right. So that would be 15% for the year. >> Correct. Not out not out of line, >> not unrealistic, but I think we're going to see a lot more choppiness first and foremost. But I think if you continue to follow the money into where the billions of dollars are being spent, Kenny, that's AI infrastructure, that's aerospace and defense, that's power, and now it's become healthcare through biotech. >> That's right. >> $236 billion of announced M&A activity in the healthcare space. First half of this year, 90% increase over last year, the most since 2021. Start a year. >> There's other opportunities out there. But and you've seen that in the market over the last couple of weeks because you've seen that rotation and where the money has gone. >> That's right. No, I agree. The 7576 is probably right on the money there. No. [laughter] >> I am so impressed that you and I are on the same page. I love that. Come >> back to that. >> Exactly. I think you're going to see some of this risk off people rotating. Exactly what you were saying is there's a lot of rotation going on in the market where you just have these huge gains in AI infrastructure or now you're starting to see it in other areas. People are going to take some profits. I think during the year and then they're going to rotate in areas where they feel like it's underappreciated like you're saying power energy some of these areas that maybe aren't as sexy of an industry and they might not see that explosive growth but they're becoming extremely essential >> right and they and they offer stability right they do offer because utilities are it's a boring group I get it consumer stables is a boring group but you know they're underperforming and if people start to get nervous you'll see that shift right you'll see money come out and and and uh and uh move into those sectors >> there's midterm elections coming up that might add some black. I don't know. >> Well, okay. So, which is, you know, now brings us to uh there's a lot going on, right, with the death of Lindsey Graham now creates more kind of anxiety in terms of the midterm elections and what's going to happen there. But look, I think the midterms um I'm in the camp that that it's going to the House is going to flip, but the Senate's going to remain. So, therefore, we'll have this gridlock, which the market likes to gridlock, right? That's what the market prefers. Um, uh, Joe, are you in that same page? >> I'm in the same page. >> Yeah, I'm in the same page. I think, and like you said, I think the markets just wants the stability. I think there's a lot of volatility and uncertainty going on. And I think that will bring a lot of calm to the markets where >> it's not, right? Because the market wants as much certainty as it can get, right? The thing that creates all the is when it's completely uncertain. Yes. Is that people don't know what to do and the algorithms don't know what to do and so you get even that increased volatility. That's right. But when you know, you can have bad news or you can have rates at 4 and a.5%. But if the market knows those are the rates then it adjusts right >> and when we have that uncertainty and if there is a divided congress >> right >> that's good for the markets and perhaps we rally from November through the end of the year >> through the end of the year >> and if we pull back enough we get back to 7500 >> right which is the camp I'm think we're going to pull back to like this 73ish hundred area and then rally back yeah right 100% you would be a buyer right uh I think at that point because I don't unless unless again something happens that none of us are none of us are are factoring in right and I'm not really sure what else could happen other than the M East blows up completely which I don't think it's going to do >> because I don't think all those other countries I think they're on our side right they're done with the with with >> unless there's another geopolitical um >> I I really appreciate you guys coming here this is a great conversation because we're going to run out of time now it's been a half an hour already but um I'd like to I'd like to you know I'm going to back to Jess. We're going to recircle around and you know maybe at the end of the year have this conversation and kind of see where it's all turned out, right? Who was right? Who was right and who was wrong. [laughter] >> In any event, until the next time, take good care.