Fed rate policies, Nvidia, Big Tech concerns: Catalysts

On today's episode of Catalysts, hosts Seana Smith and Madison Mills delve into Federal Reserve Chair Jerome Powell's second day of testimonies before the Senate, noteworthy stock movements, and developments in the tech sector.

Stock markets (^DJI, ^IXIC, ^GSPC) take center stage as Federal Reserve Chair Jerome Powell continues his second day of testimony on Capitol Hill. Tocqueville Asset Management portfolio manager John Petrides and WisdomTree head of fixed income strategy Kevin Flanagan join the discussion to analyze potential Fed rate cuts and market volatility in light of Powell's statements.

Focus then shifts to the stock performances of several trending companies. Spotify (SPOT), Mastercard (MA), and Visa (V) are among those covered, with particular attention given to Nvidia (NVDA) as it approaches yet another record high in its stock price.

The episode concludes with a focus on Big Rech and artificial intelligence. As second-quarter earnings reports are set to begin this week, concerns about market concentration are at the forefront of investors' minds. BlackRock analysts predict that AI dominance will continue to shape the landscape and extend market rallies.

This post was written by Angel Smith

Video transcript

Just before 10 am eastern time here in New York City.

I'm Sean Smith alongside Madison Mills was I to catalyst moving markets today.

Federal Reserve Chairman Powell kicking off his second day of congressional testimony in just a minute here, this time will be in front of the House of Representatives and investors are listening in for more in inside on the potential path forward for rate cut.

All right.

And with President Biden now leading the second day of the NATO summit, some Democrats are shifting focus instead of just defending Biden, they are now shifting that and pushing back against former President Trump.

We will discuss how Biden's NATO performance could impact his campaign and we got Microsoft and Apple taking themselves out of the running for open A I board seats.

This comes as regulatory scrutiny is heating up both in Europe and domestically.

So we're going to dive into what this could signal moving forward for the tech sector.

But first coming up here fed chair Jerome Powell is speaking right now before the House Banking Committee will be looking for headlines here as they come in.

But we know yesterday some of the key drivers of his commentary and therefore the market movements were some of his comments about inflation cooling sounding potentially a little bit more dovish for the market moving forward.

Let's take a listen to what he had to say.

If we loosen policy too late or too little, we could, we could hurt economic activity if we loosen policy too much or too soon, then we could undermine the progress on inflation.

But how much emphasis should markets be putting on the feds path forward?

Joining us now to discuss this, we've got John Petrini is a portfolio manager from Taco Asset management.

We've also got Kevin Flanagan, head of fixed income Strategy at Wisdom Tree.

Thank you both for joining us and thank you for being in studio.

We appreciate it.

I I do want to start with you because you just heard that sound by from Fed chair, Jerome Powell.

Did any of his commentary move the needle for you at all.

Was it more of the same?

Well, I think the Fed has been very cautious of not wanting to repeat 19 seventies fed policy mistakes of stop and go right.

So clearly, there's more conviction and I think a lead up to the Jackson Hole meeting in August where the fed will probably start talking about cutting 25 basis points or something along those lines.

So that's a really good sign I think from that perspective and those that are still convinced the fed is going to raise rates that's off the table for at least the next year.

And Kevin, when it comes to what has really been moving the bond market, obviously, lots of focus here on inflation and exactly what we have heard.

Uh Jerome Powell say and kind of the change in tune almost just in terms of the, also a little bit of worry about what's been going on within the labor market.

But Kevin, I'm curious from your perspective, what's been the biggest driver of yields when it comes to Fed and commentary and really what investors should be focused on?

Well, I think your point is very well taken that they're, they're back to the dual mandate.

Uh The whole focus had been inflation, inflation, inflation.

And I think Powell pretty much laid it out yesterday that the risks are now balanced and that he is seeing some cooling in activity in the labor markets.

I mean, jobless claims are still though 100,000 below where they normally are before recession, even the pre COVID 40 year average.

So it's not, it's like it's weak or falling off the cliff.

And I think that's what Powell is trying to do is to strike a balance here with respect to policy, going forward to the point.

Once again, being well taken, the FED does not want to make a mistake here one way or the other, right?

They don't want to be on hold too long, but they don't want to cut rates too soon.

So it is kind of a tight rope that pal and company are walking and that's what the bond market is trying to figure out and why we're going to continue to see volatility.

A highly data dependent fed, highly data dependent bond market that equals volatility.

Kevin, do you think we're going to push back up against that four or five level in the 10 year?

Yeah, You know, I I would say 4.5 is kind of an equilibrium level plus or minus, say 2030 basis points.

So 420 to 470 some people might say, hey, you can drive a truck through that but back to my point before that's where we're at at this stage of the game.

So I think if the numbers continue to come in as they have you open the door for a September rate cut.

But remember this isn't gonna be like the rate hike cycle.

This isn't gonna be, you know, every meeting, it's gonna be a little bit more choppy 25 here, 25 there, John, I know that you say on fed rate cuts.

Who cares?

Which?

Of course, what else would we talk about if we didn't get to digest this and dissect it every single day?

But I'm curious if you think that the fed cares about what the market is doing, given some of the frothiness that we're seeing and the kind of idea that there's this unofficial third mandate for them to make sure that there's not a market crash.

The Fed will definitely say they don't care what the market thing.

And I think the fact that volatility has been so quiet, like strangely quiet, the VX is really, really low that the FED is not overly concerned that they're comfortable with where their language is.

If we saw volatility pick up and the VICS get higher and you see more of a of a sell off in the stock market.

I think the FED would be definitely more market friendly in terms of its language.

So John, how should investors be thinking about positioning then just given so much of that uncertainty, you know, we've owned a position in gold for the clients that we managed for a very long time.

We increased it in January of 2023 and we still maintain a high level position of gold for our clients.

We think there's way too many, too much uncertainty with the amount of debt the US has on the balance sheet.

Gold typically does well, when interest rates come hope the FED is in the process of starting to ease that will benefit gold.

And again, we think the fiscal and the deficit and the debt situation in the US is way too uncertain.

Let's not forget that geopolitical and political risk globally is a big issue that again, with the VICS being so quiet for me it's a red flag that the market seems overly myopic on just what the Fed is doing.

Well, it's interesting too, given what we're seeing, not only with equities but also in terms of yield.

So, Kevin, I wanna go to you on that, particularly in relation to what we're seeing heading into the election come November 5th.

We saw that yields fell off the back of the debate.

Do you anticipate politics continuing to drive what we're seeing in the yield space?

No, not really.

I I do think, you know, from time to time you could see it on a daily basis in terms of trading activity.

I think overall it's the fed that that's, that's the name of the game here as you were just, you were just talking about before and, and what is this rate cut cycle going to look like we're trying to figure that out?

And I think when we're looking at the shape of the yield curve, I think that's important as well.

It's still inverted, it could un invert maybe sometime next year per se.

And that's why we've been talking about bar belling strategy within the fixed income arena trying to take advantage of that inverted curve, but also having something a little bit moving out, maybe closer to core duration.

In case things do get a little bit sloppy on the economic side, John, when it comes to some of that risk taking that we have seen, we certainly do see this appetite for risk lay out in the market.

And I think that that is something that seems to be a theme here as of late.

Could that lead to, I guess, are we starting to see excessive risk taking?

And what exactly does that then signal for?

I mean, I think we're gonna, it's gonna be important to see when the banks report earnings where risk is being taken.

It's going to be interesting to see this upcoming earnings season if the consumer and industrial start rolling over.

But that's the problem though.

When, when volatility gets is quiet, right?

You've had a rally.

You have a very strong stock market since Halloween, basically of 2023.

The S and P has only been down one month for this entire year.

People get very complacent and comfortable and it leads them to take on more risk.

You see leverage ratios going up, you know, we had the, the game stop meme craze, get back in the headlines again.

So spreads, I don't want to step on Kevin's toes from the fixed income side, but spreads are really tight from a high yield standpoint of treasuries, which means investors are taking on more credit risk to pick up just a little bit more in income.

And those are some signs that, you know, maybe risk tolerance are getting stretched a little bit too far to pick up some return.

Those are things that my antennas are up for, for sure.

Is that new way to position conservatively just growing all in even more on large caps?

No, not necessarily large cap.

I think there's value to be had.

International stocks are trading developed country, international trading at a big discount to the US.

Look, it's no surprise.

The US large cap tech is the most crowded trade.

Maybe in the history of my career.

Everybody knows the whole world for the past seven years has been in us large cap tech growth, right?

And every anything else value international small cap has created a huge discount.

So I think there are value, there's value to be had in other parts of the market to compensate for a position that basically everybody owns.

And if you don't own it individually, you probably own it somewhere in a mutual fund or an ETF somewhere within your portfolio.

So there's diversification to be had in other parts of the market for sure.

All right, John Petrides and Kevin Flanagan.

Thanks to you both for joining us here today.

Thank you.

All right, turning now to some big tech news Microsoft designing to step back from the board observer seat at open A I after the role drew regulatory scrutiny.

This comes after Apple also took itself out of the running for the role as according to reports here from the ftr big tech companies feeling the pressure from regulators in the US and the EU and that was the question that had been posed and something we have been talking about a little bit earlier here, Maddie.

And I think my answer to that is clearly it has generated some interest from regular as we talk about the outsize impact or, or some of that worry that has been circulating over the last several weeks about the outsized impact that some of these larger tech companies have had on A I when we talk about all the A I excitement, what exactly that has generated here from Wall Street, from investors from companies of the like.

And there has been some worry over the influence of that.

So you would think this move here from Apple, from Microsoft here relinquishing at those observer board seats will make possibly some of that scrutiny go away.

But I think all times really going to tell on that matter.

Well, it's really smart of you to focus on the regulatory piece because from the company perspective, we're hearing them say things like we just no longer believe our limited role as an observer is necessary.

This follows, of course, Microsoft's $13 billion investment in open A I then last November when Sam Altman was ousted from the board, the kind of resolution after sat in a kind of reinstated s on the board was to give Microsoft a board seat.

Now, the company saying, OK, we feel leaving them alone for a little bit.

They don't need the parent in the room anymore.

But I think to your point shot, that's a very convenient opportunity for them to take off the pedal from the gas a little bit there and have the opportunity to take a step back.

Given the regulatory pressure that we've seen in Europe, obviously the UK and then of course, here in the US, but then I have a broader question about whether or not the board is ready to have the parents step out of the room and what that might mean for open A I's future as we see new questions about Sam Altman moving really quickly on A I. Yeah, exactly.

And I think that is the question exactly what the future looks like for open A I if they don't have those observable role on the board here from Apple and from Microsoft.

But again, from a regulatory perspective, just given what the chatter has been, it seems like that would have had some influence here within those decisions, but we will get some clarity.

Right.

Exactly.

All right.

Well, we're turning now to President Biden.

All eyes are on him as he leaves the NATO summit in Washington Democrats are divided though about what the president should do next.

Former House Speaker Nancy Pelosi this morning saying quote, it's up to the president to decide if he is going to run.

We are all encouraging him to make that decision because time is running short notice.

She did not say which way on that decision.

So joining us now with the latest on the campaign, we've got a very Rick Newman.

Thank you so much for joining us here.

Obviously, this is a really important week with NATO members in Washington.

To what extent is some of the commentary around Biden's campaign like that from former speaker Pelosi kind of clouding the ability of these NATO leaders to be able to get anything done here.

It is certainly clouding what's going on with the NATO meeting.

The NATO meeting is really important, mainly because of Russia's war in Ukraine and the need for NATO to demonstrate that it has the credibility and the power to stand up to Russian military advances in Eastern Europe.

Biden.

You know, he has been the leader of that effort and he yesterday got credit for making a forceful speech, pushing back on uh on Russia and saying there's no chance they will win.

And commentators pointed out that, wow, he got through a whole speech without fumbling any words.

I mean that that's not the way you want your speech to land when you're talking about stuff like this.

So, um I mean, but Biden in a way, he, he kind of seems like a lame duck president almost, which would, which would be a president who is on his way out and is, you know, in the last couple of months of his presidency.

Now, Biden of course says, no, that's not the case at all.

So listen to the tone of what Nancy Pelosi said there.

Um What everybody has been watching for has been what a few of the key sort of kingmaker Democrats are going to say about Biden's predicament.

And Nancy Pelosi is one of those crucial Democrats.

And she is now kind of saying maybe Biden should think about stepping back.

I mean, she said Biden needs to decide.

Biden would say I've already decided I'm in this race.

That's what he keeps telling everybody.

And Nancy Pelosi.

Now today says, well, he needs to think this through and tell us what he decides as if.

Well, maybe he hasn't really made up his mind.

I mean, this is the Democrats have a couple of weeks to get this straightened out.

But, uh by the time we get into late August when their convention is in for sure, September, when the election is going to be in the final stretches.

Democrats need to have a candidate.

They are all behind and put all this drama about whether Biden should be in or not behind them.

We'll see if that happens.

All right.

And Rick, well, we've been asking guests all week about the possibility of President Biden, uh stepping aside in the race.

Our executive editor Brian Sazi, he spoke with Bradley Tusk, he ventures founder and CEO and asked him about the possibility of President Biden withdrawing from the presidential race.

I want to play this clip and then get your reaction on the other side.

I would tell him to step down or to, he doesn't have to withdraw.

Actually, the best thing he could do.

If he said, if he said to me, it's really important that if it's not me, it'd be Harris, then you should actually resign and let her be president and have that, that peak and purview assuming he doesn't really care about that.

The next best thing would be for him to withdraw from the race.

He can endorse her or he can say we're gonna have an open convention either way he doesn't have the power to pick the successor either way.

And like to me, the one caveat or Carrot, you could offer him.

I was like, look, now you can pardon Hunter?

So if you are, because the odds of him now winning this election feel very, very low.

I'm curious just on your thought there of what we just heard from Tusk.

And then also just this, the talk here that vice President Harris would likely be, uh, the democratic nominee, the democratic nominee if President Biden were to step aside.

Well, I mean, everybody has an opinion on this and it's not just should Biden stay in the race or should he not stay in the race?

There are many permutations here should Biden resign as president.

I think the answer to that is no, he shouldn't.

But should he resign as a candidate?

A lot of people think he should.

And if he does resign, then what happens?

Does he sort of anoint Kamala Harris, the vice president or does he endorse anybody or how do they actually figure out who the candidate is?

There's a lot going on here.

I mean, Brad Tusk has insights, his insights are interesting because he helped run Mike Bloomberg's campaigns, but Mike Bloomberg was a Republican and then an independent mayor of New York City.

And he also worked in the Senate on the Democratic side.

So he, he has insights into this.

But um there, there's a whole range of possibilities and what we've been seeing since that horrible debate by Biden on June 27th.

Is there there, the Democrats are not coalescing on any one of these options.

So, um you know, the story two days ago or one day ago was that Biden seemed to be kind of bouncing back.

He has beaten back a lot of these calls for him to drop out.

And, and then people like a oc the squad member in the house, she said I'm with Biden.

So it seemed like he was getting a little more support.

But now as we just discussed, Nancy Pelosi comes on TV and says, well, maybe he need, basically says, I'm paraphrasing, maybe he needs to think about dropping out.

So there's just no consensus forming among Democrats and people giving their opinion is not leading anywhere.

It's just leading to like a squall of multifarious opinions blowing in every direction.

All right, Rick, always great to get your insight.

Thanks so much for having on with us again and don't miss a full episode of the opening Bid podcast with Bradley Tusk Tusk Adventures founder and CEO.

That's out this Friday 8 a.m. Eastern Eastern.

Right here on Yahoo Finance.

We'll keep it right here.

If you've got much more of your market action ahead.

Again, you're still looking at just about a, a mixed picture.

You got the dow now trading below the fly line, you got the S and P and NASDAQ holding on to gains much more ahead.

You're watching.

Catalysts get to some trending figures that were watching this morning shares in video.

No surprise here moving to the upside again this morning and Wall Street remaining bullish just yesterday.

Key bank analyst John then raised his price target on the stock to 180 from 130 implying a 37% side.

We've got more bullish commentary on Yahoo finance is brand new show opening bid this morning EMJ capital founder, Eric Jackson, telling our executive editor Brian saw the that there's a world where video could hit a $6 trillion market cap this year.

Take a listen, I could see this thing hitting up, you know, between 202 50 per share by the end of this year.

Uh And so the re my, my, the reason is that um in the last five years, if you go back and look at what, you know how the forward price earnings, multiple has, has varied for NVIDIA over that five year period.

My belief is that, you know, we're now kind of going up again with NVIDIA.

And this is interesting given what we've seen over the past couple of months here, really with NVIDIA stock, of course, on a tear.

But then we had a couple of executives including Ceo Jensen Juan, selling off their own stake in the stock that led to a couple of days and was one potential reason that led to a couple of days of declines on the name along with some macro concerns and then potentially just a bit of profit taking, but no surprise to see the stock up today, particularly after the amazing results that we got in Shana from TS MC, seeing those June sales coming in at nearly 208 billion versus the estimate that was around 156.

So a huge beat there and that is gonna be a bullish signal for NVIDIA.

Ts MC is kind of the manufacturer of their chips.

And what's also interesting has just been how much attention this has obviously garnered on an institutional level, nothing new but also just amongst retail traders and amongst day traders, you talk about some of that interest within the stock and some of the data that B I has crunched here over the last couple of days saying that NVIDIA focused et have taken a 4.4 billion so far this year, that's roughly six times more than what they took in during all of 2023.

And meanwhile, when you compare it to Tesla, Tesla's amounts as to just over a billion this year compared to 2.8 billion the previous year.

So a billion in Tesla this year comparing to 4.4 billion in NVIDIA.

And I bring that up just because I think that speaks to the excitement surrounding the stock, this moat that they have created at least for now in terms of A I demand, they really have been uh the face of this, clearly the biggest driver of the gains that we had seen a year to date.

So whether or not that momentum holds, of course, that is going to be the question as it has been the last several quarters going into this earnings season and what we are going to see from NVIDIA and some of the other market leaders as to whether or not, maybe that indicates whether or not this rally is going to be able to be sustained to some point to the upside or not if we could see some broader pressure on shares.

But we'll see.

Yeah, absolutely.

A lot to come in that earnings cycle coming up here.

We're also looking at shares of Spotify, taking slightly lower about 1% after getting a downgrade.

From red burn Atlantic to ac rating.

The analyst saying Wall Street is quote simply forecasting too much growth for Spotify.

This is actually a bit of a recovery for the stock.

They were down a little closer to 1.8% in pre market trading here.

Interesting though, it's up over 60% year to date, over 65% actually year to date.

But the argument here is just about values and we consistently seen the value and critique coming up in analyst notes here saying that the expectations for growth are simply too high.

The analyst going on to say that music streaming is facing a lot of competition and structural challenges that they argue is going to prevent them from price increases, that they are anticipating to come.

And that is interesting given also the price increases that we've heard teased out from some competitors in the streaming space.

The extent to which Spotify is going to be able to be successful in their own price increase efforts remains to.

Yeah, the the the team there saying that Spotify's operating momentum has been impressive.

Consensus is simply forecasting too much growth, talking about uh some of those lofty expectations here.

So their new price target implies about a 25 26% decrease from where it had been trading.

So again, just some important things to keep in mind, they also just talked about more uh stiffer competition within the space that has been a narrative that has been a surrounding Spotify for some time, just how much pressure that could ultimately put on the company here going forward, especially when you compare to the larger uh names within this space, when you talk about Apple Music or some of the other offerings from some of the uh larger uh tech giants, and also just some of those structural challenges when it comes to that broad pays the price increases, becoming a new norm, just how much pricing power they have there and how much people are essentially willing to pay for their Spotify uh subscriptions.

And I know I was just looking at mine and it's getting more expensive and so many people are noticing and people might be making adjustments when you talk about churn to any sort of service that you're paying a monthly fee for.

You gotta think that within this time when consumers are under a tremendous amount of pressure that should be and probably is and very much is actually when you go into uh some of some of these recent analyst notes a concern here for names like Spotify that obviously rely extremely heavily on consumer spend and the health of the consumer.

All right, let's talk about shares.

Speaking of the consumer, let's talk about shares of mastercard falling after Bank of America downgraded its rating on the stock from Biden neutral.

They lower their price target for the firm from 505 to 480 now, the stock right now is off just about 2.5%.

They also revised their outlook for Visa as well.

That's falling just about 1.5%.

But for mastercard, it's the biggest lump that we've seen in just about 20 weeks.

Bank of America also downgrading Visa to neutral that stock of like I said, just around 1.5%.

Both calls are related to valuations, crowded investor positioning.

It very much goes back to the theme that we have been seeing surrounding specific names, calling into question their current valuation and whether or not they might be positioned now to take a brief uh I guess rest or down the sidelines here at least when it comes to those current valuations of whether or not some of those fundamental support where they are currently trading.

Yeah, it was interesting that the call here from the A was very much tied together for Visa and for Mastercard.

Now they say that the premier businesses for both still look like they have some upside to come, particularly given the quote competitive moat surrounding these companies and that this is a non consensus call on the downgrade.

But also interesting for those who are looking at these names heading into this earning cycle.

They do note that this is not a call on this quarter.

Specifically, they see calendar Q two estimates as achievable amid the broader consumer spending environment.

They say that's going to be enough to give them some acceleration heading into this quarter.

But they're going to have some second half of your challenges that could material wise more long term, less than the near term challenge that they could be facing.

Given that consumer environment that we are seeing here.

Well, coming up that earning cycle just around the corner, we're going to dive into the expectations for Big Tech that's coming up next on catalyst, the S and P 500 just noting its 36 record close of the year on Tuesday, it's moving higher still today.

The hype around A I has been a big driver of the rally and according to a Black Rock report, we should not expect this to change too much any time soon.

Joining us now on this is our very own.

And as for A and as yeah, Madison and Black Rock strategists are comparing the transformation related to A I, the energy transition and the rewiring supply chains to the industrial revolution.

That's because of the massive amount of capital spending that is happening in this space with estimates of A I data center investments, for example, growing by 60 to 100% annually in the coming years.

Now, what does this mean for investing?

Well, strategists see the A I theme continuing to drive returns with some broadening out into other sectors besides tech and while investors may be tempted to stay on the sidelines for now.

With $6.15 trillion in money market funds.

These strategists are saying the best returns will come by stepping out of cash and leaning into risk.

You have to be very selective fundamentals matter and you have to find the pockets of strength.

One of the things that investors want to see is a broadening out of the markets.

Nvidia and big tech have done a lot of the heavy lifting.

Now, these strategists are saying that the broadening is happening in A I and A I beneficiaries.

So for example, energy utilities, industrial health care, these are some of the sectors that are set to benefit from A I either through the build out or through the adoption of A I.

And you can see for example, utilities, we've talked a lot about you guys year to date utilities ETF is up more than 8% last year.

It was down 7%.

A lot of this has to do with powering the A I data centers, the electrification of the US and it's not just data centers, it's also chip factories, restoring of supply chains here to the US.

So by broadening out, they're meaning that this is broadening into other sectors that are going to benefit from that A I adoption and build out.

All right, thanks so much for breaking that down.

Well, speaking of tech tech is in the spotlight as investors do question whether or not the market's recent standouts, we're going to continue to lead the way higher in the second half of the year.

Our next guest still sees upside ahead for the sector and expects A I to catalyze the broader tech rally.

Joining us now to talk a little more about this.

We want to bring in Scott Devitt, he's Webb Bush, Securities Managing Director of Equity Research, Scott.

It's good to see you.

So I think a lot of people are questioning what exactly that upside looks like here for tech and these quote unquote market darlings here of the last several months.

What do you see the second half, second half of the year shaping up like, well, good morning.

And, you know, it's, it's been an interesting ride post pandemic, you know, 2022 is a very difficult year for these companies, you know, and they're, they're all getting back to their normal states now, in terms of run rate, revenue growth with operating margin expansion and generally speaking more disciplined management teams, um because of 2022.

And so, while the performance of these larger internet and and broader technology companies has been strong, you know, the past year and a half, the multiples are not extremely high, you know, relative to history and, and relative to other industries.

So we still very much like um consumer internet and uh specifically Amazon alphabet and meta in terms of the mega caps.

And we think the underlying trends and fundamentals of the businesses are as strong as they've ever been.

Yeah, it's interesting to, it'll be interesting to see what we get from this quarterly earnings cycle in terms of data around how much the investment on gen A I from those companies is going to actually lead to any tangible revenue that we can see.

Uh, can you talk about what you are expecting in terms of who might be the winners and losers based on the amount of Capex they put into A I and who will be able to prove out that investment this quarter?

Well, it's early days, you know, I mean, NVIDIA can clearly prove it after selling the chips um to all the hyper scalars right now, the companies, you know that I follow um certainly Amazon and Alphabet given that they have data center businesses that are selling into um the uh operations, you know, that are gonna be actually utilizing A I.

You're gonna start to see benefits there.

Microsoft's already seen it.

Alphabet and Amazon have have been a little bit further behind, but I could, I think you could see some quantification of revenue contribution from A I from those two businesses, as you mentioned.

Uh Both companies and meta are spending aggressively on A I uh data center wise uh in terms of serving customers for alphabet and Amazon and for meta, it's in terms of the spend to try to generate revenue over time in their consumer facing businesses.

So that's the one caveat here, you know, that costs in the short term, don't get out of control as we await the revenue contributions.

And I'd say that's probably risk number one in the back half.

But I do think, you know, the market is very excited about A I and to, to the extent that the underlying businesses remain fundamentally strong otherwise that they're gonna get a pass uh for the time being that may change in 2025.

But for the next 6 to 9 months, I think, I think these companies still have a pass, Scott.

I'm curious what you mean just about the argument of some of those rich valuations of Big Tech of A I.

Yes, earnings growth has been supportive, but the bar has been set very high this earnings season, especially looking ahead is that at all a concern just from a valuation perspective.

Well, they're high relative to history, they're not very high like um meta is a mid 20 times forward, gap earnings, multiple company and, and uh and alphabets slightly lower than that.

Amazon's um 33 times and I love Costco, but Costco trades at something like 45 times, you know, and, and Amazon is a quite different, more dynamic company in the end than, than, than Costco.

And so, you know, you, you have to take a step back.

It's always easy to sell winners um after good periods of performance.

And we've definitely, you know, probably over analyze this um in terms of making sure that we're comfortable sticking around.

But you know what I think here is that the fundamentals are strong, the underpinnings of A I while still in question, in terms of revenue contribution um are are not gonna be necessary, you know, for still a little bit of time and these valuations, whereas they're elevated relative to history, they're not really expensive relative to other industries.

And I'm speaking specifically to um my coverage area which incorporates, you know, Amazon alphabet and, and meta.

But when I look at other industries, they're just not high multiples.

I do want to talk briefly about regulation and this is top of mind for us today as we've been talking about Microsoft and Apple, stepping back from their board seats with open A I uh given some of the regulatory pressures that we've seen in Europe and domestically here in the US.

To what extent is regulatory pressure head when that you are thinking about in the names that you cover?

And which of the names that you cover?

Do you think is the most at risk for regulatory pressures?

Oh, regulatory, you know, is um is something that's been around for um with these companies for a decade or more?

And I think it's been more problematic to pay too much attention to it than it has been to just simply ignore.

It doesn't mean that that's the right answer from here.

You know, going forward, um, the last company that it probably made sense to pay attention to was Microsoft, you know, many, many years ago.

And I don't anticipate that there's gonna be anything done to any of the companies that I'm responsible for or more broadly in the tech industry.

That is a repeat of what happened to Microsoft um in, you know, the beginning of the internet cycle.

And so, uh we pay attention to it and we monitor it from a headline standpoint.

But I, I do think that um I do think that it's, it's very manageable no matter whether you're looking at the FTC attacking Amazon or um uh you know, looking at at open A I and, and um and generative and generative A I, you know, as a category and there being more regulation there because frankly, there are some guard rails, you know, that are needed.

And um and I, and I do think that from an investment standpoint, you know, investors would be better off looking at the fundamentals of the business and um and, and less so being overly concerned that regulation is really gonna slow down this cycle.

Scott I'm curious and, and I don't know if it really falls within your coverage, but as you're assessing this A I revolution, who are the losers within this space when we talk about, there's so much excitement surrounding who is leading it, who is at risk?

Do you think of really just falling behind given the rapid developments that we've seen.

Well, if you, uh so you've got semiconductors and, and then the, the cloud businesses and then the consumer facing companies and semiconductors, anyone that's, you know, try that, that's in the crosshairs of NVIDIA at the moment.

And so I think that a rising tide is lifting all boats as time goes on and the excitement passes and, and companies have to provide real results.

And I think laggard businesses in, in that area um will be presented in maybe a similar list to, to what's already been in the recent past, companies like Intel and things like that as it relates to the um the hyper scalar and the software industry, I think it's TV D Microsoft has a nice early lead in cloud.

Uh The software business is, you know, it's anybody's guess how A I is gonna ultimately affect them.

And so I think there's a lot of work to still be done there in terms of understanding winners and losers.

But I'm comfortable thinking that um Microsoft Amazon and Alphabet are all, you know, net winners in that regard.

And then finally, on the consumer side, you know, this is um this is like internet before broadband.

So talk to me in 34 years.

I have no idea.

I I would, I would make bets on the companies that have proven competency through prior cycles that they're gonna figure out A I as well.

But it's early days.

Well, Scott, that brings me to my last question last night, I was at a dinner with some Amazon executives who were saying that they see A I being bigger than their cloud business moving forward here.

Do you agree with that over the next decade?

Yes, I, I think it, um, there may be a, a hiccup just like there have been in prior cycles most notably, you know, the, that transition from dial up to broadband or whatever you want to call the various factors post internet bubble.

But um but in the long run it, it's going to be a, a massive wealth, wealth creator.

You just have to be careful, um you know, shorter term that you're not too overweight at the wrong times.

All right, Scott, we're gonna have to leave it there.

Really appreciate you joining us.

Thanks so much.

That was Scott.

Thank you.

He is uh Wet Bush Securities Managing director of Equity Research.

Thanks.

Coming up here fed chair Powell is testifying before congress this morning for the second day.

We're going to give you more hands and insights about what he says about potential future rate cuts.

That's coming up next, the chair, Jay Powell testifying on Capitol Hill today this time before the House Financial Services Committee as part of his semi annual congressional update on monetary policy here with more and she's been monitoring uh the testimony so far this morning is Yahoo Finance's very own Jennifer Schomer.

Hey Jim, what are we learning?

Good morning John on the question and answer session just getting under way as Chair Powell testifies for the second day of the semi annual testimony before Congress has signaled again that the fed is inching closer to feeling comfortable about interest rate cuts.

He reiterated to the House Financial Services Committee that he's encouraged by evidence of cooler inflation and that quote more good data would help the that get to where it wants to be Republicans already hitting Powell very hard on re proposing capital requirements known as Basel three.

House Financial Services Committee chair Patrick MC Henry told Powell that the FED needs to make a new proposal for basil three and that failure to do so would result in an immediate Congressional Review Act vote on the house floor.

Now, Powell was also asked about where the FED is in the process of shrinking the balance sheet.

Pal said the Fed still has a ways to go in that process.

He also reiterated that he believes the path for debt is unsustainable, but that the current level for debt is not monitoring this hearing for anything Powell says on monetary policy.

And we'll bring that to you when I get it guys.

All right, Jennifer, thank you so much as always, really appreciate your insights there.

Now, it's been a big headline year for M and a activity including capital one acquiring discovery, large energy acquisitions involving Exxon Mobil and Koco Phillips and of course, that ever evolving and seemingly never ending Paramount saga.

So what should we expect ma to look like?

Coming into the second half of 2024 joining now to discuss, we've got Mark Cooper Salmon partner, Ceo Mark.

Thanks for being here.

It's always great to speak with you.

I want to start on just what you're seeing.

Your team sent over some data on the increased value over all of the deals that you're seeing, but that the number of deals has decreased.

What do you think is driving that bifurcation?

Private e well, pleasure to be here and thank you for having me, but it's all about private equity.

A little bit of the um tale of two cities, uh Strategic M and A is uh is doing great.

Uh I think it's up 35% a year over year and a lot of noteworthy track.

Actually, the fact you probably saw we just announced uh advising sack from the acquisition of uh Neiman Marcus.

So a lot of noteworthy transactions, a lot of optimism in the boardroom.

Uh A lot of reasons to be employing M and A as a tool for growth and uh for value creation.

The real issue is private equity uh and private equity has yet to come to that um uh that equilibrium point where buyers and sellers expectations meet.

Um And it's a particularly long time uh since the run up in interest rates that, uh, it's not gotten to that equilibrium point.

That's unusual.

But then again, we've been through some pretty unusual times over the past three years, given the pandemic, given the excess capital in the marketplace, given zero interest rates and then a 500 basis points or 525 basis point increase in interest rates.

And it's just taking time to, uh, to work through the system Mark.

I'm just curious, your thoughts is private equity in a bubble right now.

That's about to pop.

Given what you just said.

Well, I always think about bubble as people who've been overinvested in assets and you know, now they're going to be uh uh there uh it, it's gonna pop but in this case, it's more of a, it's more of a cork coming out of a bottle if you will.

So, uh there are an unprecedented number of assets owned by private equity that are slated for sale, but don't uh but are not getting done because of price discrepancy.

It's really gonna be an issue just of accepting what the new price reality is.

What will that mean to private equity?

Uh Well, it means the vintage of that, those funds will probably not as good as prior vintages, um which has happened before.

Uh I don't think it's about distress.

I don't think it's about them having to go through uh recapitalizations and transactions that will wipe out their equity it just means lower returns.

But once in fact, they get through that uh divestiture sequence, uh it'll just open up uh all the their ability to deploy the excess capital they do have, which is still an unprecedented amount I heard on the order of $1.2 trillion that's out there to invest, which they can't do until they clean out the system.

If you will mark, I guess my question is in terms of what's gonna be the next catalyst here for M and A.

We talk about the need of participation here from the pe side.

But what is it, what needs to happen in order for that activity to pick up and how much of that ultimately really hinges on the fed cutting versus something else that's going to be the driver here in the longer term.

There's nothing about the market that prevents people from doing transactions as you're seeing.

Uh There's plenty of debt in the market and again, back to the S A transaction.

Uh we raised $2 billion in, in debt financing and there were plenty of opportunities and different and different actors who we could have worked with.

So it's not like there aren't the tools out there to get deals done.

It's a matter of price.

What could be the instigators to taking or to removing that cork from the bottle?

Yeah, it could be uh uh an interest rate cut.

And would that make a huge difference.

Yeah.

Well, maybe it'll, it will harden the view of sellers to say, well, if it trades it down, I still want my my price.

So you could look at that as a positive or negative.

Uh But it could un unlock some of the jam between the difference in a compromised fashion.

Uh The other thing just is time because there is a different strategy which people are employing, which is to say, yeah, we wanted to sell last year and that would have been a better return on my investment.

But if I wait another year and I earn more on the business that I'm selling my dollar that I would receive the amount I would receive would be the same albeit at a lower multiple, which won't be great for greater returns, but it will be great for a return of, of capital in terms of uh what we refer to as MO IC or money, money, uh uh money on top of money invested really quickly.

Mark I'm wondering what you're seeing in terms of valuations.

Are you seeing people coming in and expecting to get the record breaking valuations that we're seeing in the broader market with some of the big tech names?

Well, it's so fascinating because, you know, keep in mind the private equities on both sides of the equation.

On the one hand, uh they're buyers and they say, well, that assets not worth that.

And, and then at the same time they're a seller and they say, well, my assets worth that.

So it's an interesting quandary.

Uh There are still the best of the best as always is the case uh is are getting some, you know, getting some nice values, but it's not yet rebounded.

21 was a high water mark.

Uh It then came down but it's not to where it has been historically, it not, is not at multiples where it needs to, needs to be to clean out the system.

All right, Mark Cooper Solomon, partners, CEO, thanks so much for having on with us here this morning.

Great to talk to you.

Thank you.

Keep her here on Yahoo finding us.

We got much more of your market action ahead.

Stay tuned.

You're watching Catalyst.

Let's talk about earnings season.

It officially kicks off tomorrow.

We've got Delta Pepsico Con Agra brands all set to report tomorrow and then we've got a huge day on Friday with the big banks.

Analysts now are expecting growth to start to broaden beyond tech.

And that really is a question here.

Matty of what so many investor strategists have been talking about here on our air over the last several weeks and several quarters is just when we have this market dominated by a handful of tech names.

Clearly, they have really been driving the earnings growth picture and I wanna pull up this chart right that we have right now here from Wells Fargo and this was one of their charts of the days uh most recently here, I believe it was last week and they were talking about the uh performance of magnificent seven when it comes to Ernie growth versus those within the SNP minus the mag seven.

And you can see the mag seven names are the dark purple versus the rest of the and P which is that lighter blue.

And this earnings season, second quarter of 2024 is when we finally see the rest of the S and P index, that growth return here and flip from negative back to positive territory.

And of course, this is extremely important when we talk about the broadening potentially of market participation, what exactly that could signal in terms of some of the momentum in terms of some of the leadership that we could see going forward.

So that of course, is going to be one of the focal points here for investors for strategists over the next several weeks.

Yeah, it's really interesting because we're seeing some data from Bloomberg Intelligence as well showing that there is this expectation of earnings growth for those other 493 names expected to post the first positive profit growth in the last six quarters, potentially seeing double digit expansion by the fourth quarter in the names.

Meantime, earnings growth growth for the mag seven expected to slow to just 18% in the second quarter, which is obviously a great number still, but it's about half of last year's average.

My question is what we're going to start to see heading into tomorrow on some of those consumer names.

Are we going to see the consumer weakness that we've heard?

Start to show up in those earnings reports.

And what does that mean for the broadening out question mark here?

Well, coming up, we've got wealth.

It's dedicated to all of your personal finance needs.

Our very own.

Brad Smith is gonna have you right here for the next hour.

So stay tuned for more.