Wall Street is Warning: The Crash of 2027 is Coming: PREPARE.

Wells Fargo just turned bearish on stocks which to me is almost a screaming buy signal and one of the reasons we were really bullish this morning in the alpha report and we increased our bare bull scale. We had uh purchase shoutouts on Palunteer and Tesla but there's a rationale here and it's almost inversing some of this caution although they also have a point on hardware. It's another thing we mentioned in the alpha report this morning that hardware is seeing this receding tide where software and obviously a catalyst driven event like Tesla can actually really see a bull movement here. Let's analyze what they're saying here because they have a point about hardware and they give a warning and it's useful to listen to it and add some context. So let's get into it. >> Information equipment uh information processing equipment. So basically semis and hardware that currently represents about 3% of total economy which is already above the internet peak cycle and we have that going up to you know close to 4% and that's actually going to be above the railroad investment cycle back in the 1800s. So this is essentially the biggest investment cycle ever almost and our concern is that 2027 might be the peak capex year. I don't think uh capex is necessarily going to roll over after that but even flat growth >> peak almost like a dollar amount. I mean we could potentially see like a little bit of growth in 2028 but if c say capex grows at GDP plus in 2028 >> I don't think semiis necessarily work from here and I don't think anyone's really positioned for that in the market. >> So you're turning cautiously because of capital trades. Does it have anything >> an argument here by Wells Fargo that hey we're hitting peak capex because historically we peak out at certain levels of GDP. Uh and I have a chart on exactly this. So this is adding color to what he just said. Take a look at this. Hypers scalar capex is considered late cycle measured at a macro level. This actually comes from Bank of America. Bank of America here saying that sector capital expenditures as a percentage of US GDP as represented through each cycle's speculative build well cycle phase they call it. Uh and so on the far left you could actually see the US railroad spike where we spiked up to just over about maybe 2 and a4% of GDP uh capex to GDP. Then you had the oil and gas boom of the 70s to 80s. Then you had the telecom boom over here which didn't quite get as aggressive. Then you had the oil and gas shale boom, the fracking boom. And now you've got the hyperscaler boom. And what they're arguing is that we're kind of getting to this sort of peak level here. Now, what's fascinating is that at the same time as you have folks like Chris Waller saying, "Hey, we could see a boom and not necessarily see prices go up because of the way supply and demand uh works as long as supply catches up." And as long as they're both growing at the same rate, you don't actually see prices go up. What's crazy is you have estimates from companies like Broadcom that they're expecting a doubling and then another doubling. I have that uh this was from our this I'm just I'll show a snippet from what was in our course member live stream this morning because we went we went pretty deep on uh on some good insights uh which obviously you could join over at mekevin.com use that coupon before it exposed expires Friday but look at this our demand us our demand actually exceeds the outlook that we will double AI revenue to approximately 115 billion. Uh and they then say for 2028 we expect this growth trajectory to continue. We have line of sight for fiscal 2028 semiconductor revenue growth to again double to $230 billion. So, in other words, you have a company that's saying, "Hey guys, you know, we're about to see AI revenue go up to $50 billion, and that's cool and all, but it's actually going to go up to 115 billion in 2017, and then it's actually going to double again to about 230 in 2028." Now, how sustainable is that? Well, that's probably why the market is assigning some discount to a stock like Broadcom. Broadcom just reported earnings, and there's some nervousness that wait, how is this sustainable? Broadcom's trading like a point uh nine peg ratio right now. Really cheap. They're paying off debt with their cash flows. I wouldn't be surprised if within the next 6 months these guys end up being debtree because they are just printing money with their 55% net margins. Although last quarter was a little bit lower and some of those margins could end up getting hit by the more they sell XPUs to companies like Anthropic, Google and Meta. the more their margins do get hit a little bit, but the margins are still great. The problem is you're just in cycles right now. Right now, there's a lot of bearishness going on around hardware. And that's what we're arguing in the alpha is that hardware, while it's tempting to buy the dip, it's too soon. Instead, we literally said this this morning, instead of buying the dip on hardware, buy the dip on Palunteer because it sold down to our support level. And if you look at Palunteer for example, this is why I think a lot of people love being as part of the alpha membership and getting their alpha report every day. But if you actually jump over to Palunteer, and this is what we base the alpha on this morning, I'm like, look folks, we literally came within a buck and40s of our 164 support line. That is a bullish setup for today, especially when you have a short squeeze going on on Snowflake. Okay, we said that and made that call before the market opened. And literally, look at this. It's been the elevator up like all day long, which is great. Obviously, hope we can continue calls like that because they're really good. In addition to the call we made on Tesla, freaking Tesla right now is up 6%. And we were bullish on it this morning. We got a we had a price target for two weeks on this and uh at this trajectory, we might end up exceeding it. But the point here is you've got this bearish narrative happening by the suits. and it's happening at the same time as the market is being sort of like receding its enthusiasm on hardware. But I actually think that's just momentum. You know, you've got this like wave of momentum where or I I kind of like to use the sheep example uh and the more you kind of think of the sheep example sometimes the more it makes sense. And we'll go back to looking at the rest of that interview here, but think about the sheep example like this. So hardware before the sucketing all the sheeples are in hardware and I'm like guys software's next Q3 Q4 software bottom baby let's go. We just said it publicly here it's not a secret you know I think you get a lot more context than the alpha membership but we did say that publicly as well. Uh and so now all the sheeples are running over here and so you've got this extreme bearishness over here. It's possible we actually have to get through a couple other sectors, but if these Broadcom growth numbers are accurate, we're probably gonna see a hardware 2.0. We just don't know yet when that's going to be. My guess is probably after the anthropic IPO and once we get some more profitability, but hardware is not fundamentally selling off right now. It is fund it is technically and momentum based selling off because the sheeples are running over the software. It's fine. You just want to try to be ahead of the sheeples. The thing is not all the sheeples are at software yet. There's actually still time. Uh and I think that's why you keep seeing this red in hardware. Okay, going back to uh the Bloomberg interview. I think that that was useful extra context that they didn't provide here. Let's keep listening. >> To do with the Federal Reserve or is this just just pure math? The size of the economy versus the size of the amount of money they're looking to raise. >> Yeah, I mean I mean it's both. It's the size of the economy, but also everyone's trying to raise capital, right? whether it's the private private side or the public that the government is hungry for capital as well. So I I think everyone's really fighting for capital right now and that's why we're seeing yields going higher. It's really because of this >> the suckening that's what he just said. He said everybody wants to suck and that's fine. That's not necessarily a bad thing. the the the what you have to take away from that is the initial reaction when you hear somebody say everybody's trying to raise capital is that they need money. Well, of course they need money, but they're investing in things that they see as good investments as profitable, right? But initially it sounds jaded like, oh, are they going bankrupt? Are they like struggling? No, they're raising out of strength, which is great. Yes, it's circular in nature, but when you suck, there's less money for the public stock market. So, like as an example, okay, if we're like, "Hey, you know, we've got really exciting projections for what we could do with our sales at my startup, Reinvest, uh, come invest, uh, you know, in us or whatever." Let's just say, okay, we're not raising money right now. I'm just making an example. And then somebody's like, "Kevin, I I love this vision. I believe in this. I believe in the backing of the real estate. I believe in the software you guys are building. This is really exciting. You guys are trading for real estate valuations and you're like a secret software company. I'm going to buy. Somebody takes, let's say, $100,000 and invest it. That's $100,000 that's not going into Nvidia stock potentially or into Broadcom stock, right? like the money if it moves to where the sucking is happening then it's not in the public equity market. That's the takeaway there. Uh and and again I want to be clear dear SEC your regulators whatever we're not raising money right now. This is not a pitch. It's an example for education purposes only >> deficits as well as >> not forward guidance not a projection >> obviously but you know in this environment and the capital cost is only going higher for hyperscalers as well and it's increasing >> that is a risk that is a fair risk that is a funding risk that yes it is more expensive to raise money today than it has been now there are companies that can pay those higher prices, but at some point you hit this wall where it's like, man, rates this high, like there's a limit to how much debt we can raise at those prices, right? That makes sense. >> Difficult to justify further investment uh beyond 2027. >> So, >> the further you go at more expensive rates, the more you really have to have this insane bull case to argue we should raise even more. the ability for semiconductors to fall out of bed to essentially see their valuations decline significantly, maybe see some of the hyperscaler valuations come down even further, but have the rest of the market not fall out of bed, do okay, actually outperform. >> Yeah. So, I think the S&P at the index level is going to be okay. And I I do think we're a little early on this call and but I don't think we're too early by like a year. I think we might be a little too early by like a month or two and as you look into >> by a month or two. So, so they're basically saying hardware is about to dump in the next 60 days basically before midterms. So, it's like he's basically saying avoid this sector before midterms. Crash incoming. [laughter] I think the view is going to be is this is this really the peak capex year and what about 2028 and looking at how semis are trading these days after especially after earnings posting good numbers semis are not trading on 2027 and EPS revision anymore it's really about the sustainability of this capex cycle and increasingly about 2028 and we don't really feel good about 2028 >> if you're saying it's unsustainable I really struggle to see how the index holds up when you're seeing so much of this thing, it's pervasive. >> Remember, there is a problem with the S&P in terms of how much of the S&P is exposed to this whole like AI trade. It's like, isn't it like 38% or something ridiculous? It's it's a really high percentage of the S&P 500. You should look it up. Uh or you know, we we'll just Google it really quick. Exposure uh SNP 500 exposure to uh AI uh and tech. Let's just see. Uh and then I I mean if you include the financials that are benefiting as well. It's crazy. Uh the top 10 companies make up 40% of the index. So that's Amazon Alphabet, Meta, uh right? So that's there's that 37 to 40%. If you then include financials, you're over 50%. Why do you include financials? Well, because remember all the sucking that's happening? Those are commissions for Morgan Stanley and Deutsche Bank, baby. [laughter] Come on, man. the way through the stock market. Had so many people come on the program this year and say the whole thing feels like one trade. >> Where's the support coming from? >> Yeah. So I mean think about think about it this way. So if you look at the S&P at the index of all we you wouldn't know what happened in July when semis were down 20%. So there's this offsetting factor you know software outperform hyperscalers outperform >> financial started to pick up but financials again feels like an AI trade too. >> Yeah. So I think I think semies are going to get hit first from what we were talking about. I don't think the index at the S&P at the index level will pick it up until later in 2027. Uh so I think so he actually gets bearish S&P 500 later 2027. Now in fairness I personally have made the argument that we are more likely I've got too much drawing on here. Uh I have made the argument that the end of 2026 especially post midterms sees the highest increase in stock prices and that things in 27 uh actually get a little bit harder. So I do think we have more uh resistance if you will in 27. Now I'm not calling for a selloff like this guy but I do think it gets harder in 27. You know, I think it makes a lot of sense to reduce beta from here and start owning quality. >> Where's that quality at the moment? >> I think software still looks interesting. Uh, but also a lot of cash flow generating businesses. Uh, >> wait, wait, wait, wait, wait, wait, wait, wait. We need to like play that back, baby. Did he just say software looks interesting? I think he did. So, he said reduce beta. So beta is basically you know what is your uh movement when the S&P 500 goes up 1% how much is your stock moving. So as an example if uh Tesla has a beta of two the S&P 500 is up 1% Tesla would be expected uh to be up 2% just as an example. So uh I could actually pull up the historical beta right now for Tesla. So this is going to be relative to the S&P 500. Uh it has a raw beta of about 1.8 8 and an adjusted beta of about5. Adjusted is attempting to look forward. So basically, it's beta has actually fallen. Uh so it's trading a little bit more in line with the S&P 500. You could also change that beta. You could change it to let's just say the NASDAQ. So if I change it relative to the NASDAQ, I would guess it should be closer uh closer to one. Yeah, the adjusted beta is about 1.37. So beta is an interesting measure. So when you hear beta, you think first of all second to the alpha report. Uh and then uh think relative movement to an underlying index generally to the S&P 500, but it could be to the Dow, it could be to the Q, it could be it could be beta to anything technically. You could do to another stock to Nvidia. Uh but anyway, that that gets too complicated. The point though is he's basically saying reduce risk outside of the index. And one way you could do that is with mega cash flow generating businesses. One of the reasons we bought Salesforce at $163 was because at the time they had like literally a 13% uh free cash flow yield, which is insane to think about that they could make that much money in free cash flow. Let's go look really quick. So, if I just go to our stock tab uh for course members. So, if I go to Salesforce, this is in the Meet Kevin app. Uh the momentum's been crazy. I've still got this at a 458. I think it could potentially get up to $500 on upside, but uh let me see here. If I go into my cash flow notes uh for this company, it really goes back to July. I've got to find it. But it was somewhere around a 13% free cash flow yield, which was really remarkable. Uh and and I even wrote that they don't do buybacks yet, but their balance sheet and cash flow is so strong that I made this case in our course member calls that they're probably going to see a surge of buybacks coming. We just don't know when yet. Uh, looking at some more of my notes here. Salesforce, Salesforce, we talked about them borrowing $27 billion to buy $25 billion of their stock, which is crazy. You could actually see that right here. And here's their cash flow. So, I literally had them, this is a note in our course member uh um sheets here. Listen, look at what I wrote. This was written July 1st. Okay, look at this right here. I write uh the Mark Beni off, and this is sort of my paraphrase of him, the Mark Beni off quote, I'm gonna borrow to buy my stocks dip could be the biggest big ball move ever or he's a full And I wrote, I lean towards big balls. [laughter] Honestly, the guy has like an average purchase price right now of 191. We got in at like 165. We're like, this is ridiculous. And you know, now it's trading for like 265. So the guy's way up on the dip buy of his own stock and the cash flow is insane. Uh now I did uh don't annualize the cash flow. That's actually a mistake. I did make a note. You do not annualize the cash flow for uh Salesforce because they have lumpy cash flow. But their cash flow is expected to be somewhere around $15 billion. So if you take $15 billion it for fiscal year cash flow and you look at Salesforce that's now trading for well yeah here 264 uh it's a 217 uh billion company their free cash flow yield right now is about 6.9%. That's a great number. Uh but if you go back to where they were when they were trading for 165 divided by 265 they were trading 38% lower. So 217 yeah 217 * 62 it's about $134 billion valuation 15 divided by 134 well on this calculation I've got them at about an 11% free cash flow yield is where they used to sit and they're still at 6.9%. Now even though like I'm bullish Palunteer I just want to be clear Palunteer's free cash flow yield is like 1%. Broadcom is like 3%. 6.9% at Salesforce. That's insane. And then you look at a Crowd Strike, which I'm bullish on as well, but the valuation is really high. You have to have really like sky-high growth estimates for this to make sense. You know, their cash flow yield is like 0.9%. So, I think there's there's a point in what this Wells Fargo guy is saying is like, yeah, you know, people might like having some of that safety of strong free cash flow yield. So, I completely agree. Let's keep listening. And with even within industrials and we we do like maintaining some AI [laughter] FX exposure >> somebody in the chat's like he's a course member maybe >> but more through uh sectors that are correlated with semis but with lower beta such as capital goods so think about power things like that and and hardware so those are some of the areas that we would lean more into. >> What magnitude of declines are you talking about in the semispace? I think we could see another 10% decline. I mean, if we if you're right and we actually >> another 10% isn't actually that bearish, but he's essentially saying the Philadelphia semiconductor index, as an example, could go down another 10%. I mean, yeah, if the Philly Semi goes down 10%, that probably works out to like 20%. For like an AMD or or Broadcom or whatever, right? So on an index level 10%, you know, 10% on itself doesn't sound like a lot, but he doesn't mean each individual stock. He means that more at an index level. I believe >> see 2020 capex potentially being at risk. Uh I think I don't think anyone's really positioned for that. >> Frank Lee's coming up of HSBC. I think Frank's going to have some thoughts on this. >> That's roughly the end here. They kind of start talking about another analyst coming up. Uh so he says 2028 is the risk but remember what we saw from Broadcom and I want you to remember who Broadcom is selling to. Broadcom is selling to Google and Meta and Anthropic. We know that Google and Meta make lots of money. Big pee pe. >> Big pee pe. >> Like hallelujah money. Hallelujah. [music] The anthropic uh question I think is what's creating a lot of fear for people. It's like hey man you know but what if anthropic can't afford to keep buying these chips? And that's a very fair question which actually makes the Anthropic IPO vital for the future of capex spend. And so Broadcom with their projections of a doubling and then a doubling could actually honestly keep growing should uh we uh what's it called? Um should we see Anthropic do well and maintain a profit [music] and kind of become almost like a software play. Uh we'll see. That's uh that's where there'll be some nervousness until we actually get that S1. But that gives a lot of color to what's happening in markets now. So, with that, uh, make sure to join us over at me Kevin. Get that coupon code at me.com [music] before that extension expires tomorrow at 11:59 p.m. That's it. NO OTHER EXTENSIONS POP. >> WHY NOT ADVERTISE [music] these things that you told us here? I feel like nobody else knows about this. >> We'll we'll try a little advertising and see how it goes. >> Congratulations, man. You have done so much. [music] People love you. People look up to you. Kevin Praath there, financial analyst and YouTuber. Meet Kevin. Always great to get your take.