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The Exchange
Fed Decision, Memory Momentum, and Mag 7 on Deck 4/29/26
00:39:19
As Jay Powell's time as Fed Chair comes to an end, our experts discuss whether he should stay on as a governor and what successor Kevin Warsh's first moves will be. Memory stocks surge after Seagate's blowout results. Plus, Alphabet and Microsoft hit all-time highs ahead of their after-the-bell reports.
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Kelly Evans
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Announcer
This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information packed daily market Preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions and key results and statistics that may impact your trading. Download the latest episode and subscribe@schwab.com MarketUpdatePodcast or find Schwab Market Update.
- [00:57]
Kelly Evans
Wherever you get your podcasts, you're listening to the Exchange. Here's today's show. Thank you very much Scott. In 90 minutes, the Powell era for the Fed will be over with his last press conference as Fed Chair. Unless it's not. Welcome to the Exchange. I'm Kelly Evans. A quick check on stocks shows slight declines across the major averages with the sell off picking up steam in the past hour or so amid the rising price of oil which could be a factor here. WTI now trading around $107 a barrel, a 7% pop today on some negative news flow about the Iran situation. Brent hitting 119 probably above that now and the national average at the pump today hitting a new four year high, $4.22. Elsewhere, shares of Seagate and NXP are soaring after their strong results last night. But that's not enough to keep the Nasdaq in the green as we await four major tech companies reporting results after the bell today and the Fed's decision on interest rates which is due out at 2pm Eastern. Let's get straight to Steve Liesman in Washington with the final walk up to that and the big questions hanging over today's press conference.
- [02:10]
Steve Liesman
Steve hey Kelly, thanks. If all goes according to plan, Fed Chair Powell just presided over his last meeting as Fed Chair and is about to hold his final and 64th press conference with Kevin Warsh set to take the helm and usher in what he has promised to be regime change at the Federal Reserve. Now here's the next step. Senate Banking just Approved Kevin Warshaw 13:11, so his nomination goes to the full Senate expected to vote the week of May 11, the last day of Powell's term. May 15 first meeting for Kevin Warsh would be June 7. He still as Powell is set to leave. Several questions remain to be answered. I'll go through a few of them here. Will the statement shift to neutral? There have been some rumblings among some Fed officials that maybe it's time for the Fed to indicate the next move could equally be a hike or an ease, though that seems unlikely to happen today. Second, will Powell stay on as governor after his term as chair ends? We asked that question in the cnbc Fed survey. 60% say no, he's not going to stay on, 32% say yes. Some markers that Powell could say that he's waiting for. We'll wait to see how he answers the question. But the DOJ appeal deadline for the subpoenas, that's May 4th. The IG report that could come whenever SCOTUS Cook decision might have happened today did not happen. And then maybe naming his successor, which many believe will be current Fed Governor Stephen Myron, perhaps. While Warshaws indicate a desire to cut rates, markets seem to believe the combination of high inflation and oil price spike could hold him back. The probability of rate hikes remains low all the way out to July 2027. And it's the probability of cuts has fallen again today now around 3 or 4% or sorry, 2.3% for the full year. Of course, the chair holds significant powers of persuasion so he could cobble together a majority for cuts. But the data is going to have to be on his side. He's going to want to move markets over to his side to Kelly, which are decidedly not on the side of cuts at the moment.
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Kelly Evans
But regardless of whether he stays on the Fed in some capacity, Steve, this is almost certainly going to be his last press conference as Fed Chair, right?
- [04:07]
Steve Liesman
Yes, that's correct.
- [04:08]
Kelly Evans
There's nothing that would interfere with that at this point, barring some major twist in the wash confirmation process.
- [04:16]
Steve Liesman
Yeah, I mean you'd have to have something happen with the Senate, but he would be confirmed as Fed Chair the week of May 11th is our understanding. And by the way, that reporting comes from our congressional reporter Emily Wilkins, who probably, by the way, get, get the least bipartisan. Maybe there'll be one or two Democratic senators who vote for him, but I believe he'll have the question is whether he'll have more or less than the 53 votes that chair Yellen got back when she was affirmed. That was also a very partisan vote as well. So that's one thing. The other thing, Kelly, is I'm seeing these with oil prices up and then you'll probably be covering talking about the two year today up near 390 as well and the four year up near the 10 year up near 440. So those are interesting developments here that are going to be greeting the new Fed chair if they stay where they are right now. But certainly the market either incorporating inflation, it seems to be moving with oil prices. So that's a big story and all of that diminishing. Well down the road, the market's view of the ability of the new Fed chair to cut interest rates.
- [05:22]
Kelly Evans
I'm always a little surprised that the markets assume rate hikes would follow higher oil prices. But markets know this game better than I and that's the verdict they're rendering, at least for now. Steve, thanks. Appreciate it. We'll let you know. Steve Liesman, get ready for that decision at 2pm we'll see Steve then. And if this is indeed Powell's last press conference as Fed chair, let's look back on the career that he's had leading this institution. Since Powell became fed chair in 2018, he's had to navigate a pandemic, a trade war and a major conflict in the Middle East. The unemployment rate hit a high of 14.8% in April of 2020 and has since fallen to about 4.3. Inflation, that's the big story as well, peaking at 9.1% in June of 2022 and remains sticky, hovering at 3.3. That's above the Fed's 2% target. But the stock market has had a huge run under Powell with S&P 500 returns of nearly 13% annually, beating the average of 9% historically. While all of that may look good on its face, his policies have not been without criticism. And while Kevin Marsh may want to shake things up at the Fed, our next guests say real change won't happen overnight. Let's bring in Claudia Sahm, chief economist at New Century Advisors, and Greg Epp, chief economics commentator at the Wall Street Journal. Welcome to both of you. Claudia, what's the verdict you would render on Powell's chairmanship, which appears today to be drawing to a close?
- [06:46]
Claudia Sahm
So Powell has led the Fed with a very steady hand through very unsteady times in the world. It's not he hasn't made all the right calls, but I think, you know, some of the times we're waiting on the inflation. With the pandemic, there was a real course correction. The Fed, you know, went hard in terms of rate increases. And it is truly notable to see the disinflation that we've had since then. Without a recession, there are very few Fed chairs that can claim a recovery quite like that. So I think overall, you know, there's a lot to, to praise in his leadership and there's also a lot to improve upon. Absolutely.
- [07:23]
Kelly Evans
Greg, a lot of people from the start pointed out he was a lawyer by training and not an economist by the end of his tenure. That's looking more relevant. But how, what would you describe as kind of the early verdict on his chairmanship?
- [07:36]
Greg Ip
Well, I think that there are two pieces to that story, Kelly. I mean, if this, if Trump's attacks on the Fed hadn't become part of the story, I think people would actually be somewhat ambivalent about Jay Powell's tenure because after all, he is leaving office with inflation substantially higher than when he began it. Now, there are a lot of reasons why inflation is higher, and surely he's not to blame for Covid and he's not to blame for the war in Iran, but the number one mission of the Fed is to deliver low, stable inflation and that he can, he cannot feel that happy that he's leaving office without that in hand. And I do think that that will be part of his legacy afterwards. But I also think in the larger picture, people may end up caring less about that than whether he was a bulwark that prevented the Fed's prize independence from being eroded by this singularly norm breaking president. And that will be the bigger part of the story. But of course, it's a story that
- [08:26]
Kelly Evans
is not yet over on the point of inflation. Greg, is there anything he could or should have done differently, not just in 2022, which is the one that is most discussed, but even over the past couple of years?
- [08:38]
Greg Ip
That's very hard to say, but I would certainly point to a few things that I think that even he himself would admit he had wished he had done differently. So it was kind of like terrible timing that they decided, decided to change their definition of price stability and their framework for achieving 2% inflation in the fall of 2020 to effectively allow more upside surprises on inflation in order to make up for low inflation in the past. And then in the fall of 2021, as inflation began to significantly exceed target, they of course made their infamous call that this would be transitory, and that delayed by quite a few months, not only when they started raising interest rates, but simply this step of halting quantitative easing. Now, would changing either of those decisions have materially affected where inflation went? No, but I do think it speaks to a misplacement of judgment at the time that left the Fed further behind the curve than it ought to be now in the last few years, you're asking. I, I think that they. If you. There's 15 ways to cite the data and my own view, and I think most people view, is that we are converging back on 2% and in time, Powell's stewardship through this period will have proved the correct one. But we are also seeing one supply shock after another. Fed chairs do not control that and that will deeply complicate the picture.
- [09:49]
Kelly Evans
Cloudy, a jump in here. Chime in on that. And kind of the postmortem of those moments or those opportunities, like Greg said, there were perhaps misjudgments about inflation. And at the end of the day, this fight about independence may supersede that, at least in the eyes of history.
- [10:06]
Claudia Sahm
And so absolutely, the lessons from the pandemic and Powell has been open about mistakes that the Fed has made. And I think importantly for this moment, we see those lessons learned. The Fed very much has moved into kind of a risk management mode in terms of monetary policy. And right now the risk that is most prominent prominent is the elevated inflation. And part of their risk management is being very savvy about seeing evidence. They've built a base case that, you know, the tariffs are going to be one off, they're going to roll, but they want to see it in the data before they start moving again. And I think this is that kind of risk management mode, that learning that looking evidence and not getting too far ahead on your skis about forecasting, it's transitory. We'll look through this. The timing that is a legacy that Chair Wash is going to inherit from the committee because I think this really is ingrained in how they're dealing with these supply shocks.
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Kelly Evans
And you say, Claudia, that the test starts today for this transition from the Powell to the WARSH era. What do you mean by that?
- [11:09]
Claudia Sahm
So my first inclination was to call this the end of an era, and I'm not really sure it's the end of the era. Wash has raised a lot of questions. Some of them I agree with in terms of, you know, where the changes the Fed's made over the last 20 years, were they smart, whether it's forward guidance or it's the balance sheet or, you know, how you measure inflation.
- [11:28]
Contessa Brewer
Right.
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Claudia Sahm
Like there's so many things that you need to have a discussion about. And I think WARSH is going to really Push kind of a deep dive into how the Fed has been conducting its policy. I'm not sure that he's going to come up with really changing the way the Fed does it because I think actually a lot of these things have been pretty smart. There's, you know, potential innovation. But I think he's really going to kick the tires on a lot of what we've kind of come to just accept as business as usual at the Fed. That can be a healthy process. It can also be a totally chaotic process as well.
- [11:57]
Kelly Evans
What do you expect, Greg, and what order do you think he might start to tackle? Things that range from kind of near term monetary policy to the balance sheet to broader frameworks about, you know, how the Fed should be using its tools.
- [12:10]
Greg Ip
So Warsh has been much more vocal about what he thinks the Fed is doing wrong than what he would do differently. I badly like to hear from him on that, how he plans to do things differently. I would venture that perhaps he's going to suggest that the staff and the committee bring a few additional models to the table when they're projecting inflation. Maybe he'll, for example, suggest more attention to monetary aggregates. They haven't done that in 40 or 50 years. He might suggest a greater role for looking at fiscal policy as a contributor to inflation pressure. He has talked about communicating less. Maybe we'll have fewer press conferences. He's talked about not focusing on what's on the right side of the decimal when it comes to inflation versus the left side. Now, I suspect that some of that is going to meet the hard world of reality and that if, for example, inflation comes in a quarter of a percentage point higher than expected three months in a row, he cannot run away from that. He's going to have to opine on what that means for the forecast and so on. So I do expect changes. But I also think that the war Fed will, in the great expanse of history, not be that much of an outlier from what we've seen in the post war period.
- [13:12]
Kelly Evans
Claudia, a final word on that and there's a couple of things in there that, you know, I don't know if people would mind too much if he wants to focus on monetary aggregates. We probably need a better theory of fiscal policy to prevent what happened in 2020 from happening again. Fewer press conferences. I mean, we'd all say, yeah, we remember that era, it was fine, but the market doesn't want it probably to go in that direction or maybe it would appreciate. I don't know if that's really on the table. What else do you think could possibly be up in the air now?
- [13:43]
Claudia Sahm
I think, you know, Warshaw has raised a lot of, a lot of questions. I will say with the communication, it's not just about trying to the markets. The communication has been a way that the Fed's tried to be more accountable, like try and explain what they're doing. And that, I mean, the fact that we even have a press conference this afternoon really does owe to Powell. He's the one that then said, we're going to do this every meeting. We don't have a dot plot today, but we got a press conference. And so I think there's going to be some big questions about how do you stay accountable as an institution if you become a lot quieter. So there's a lot of big things in play right now. But, you know, we will see. I agree with Greg. I think there'll be more continuity than maybe Warsh is flagging right now. There's a chance that we'll see some real changes.
- [14:28]
Kelly Evans
And finally, Greg, anything in the very near term, as we understand now that he's kind of past this morning's hurdle. The Senate goes on recess. They'll be back the week of May 11th. There will be, I think, four votes before he's finally installed. But it looks like with the comments that Tillis has been making, this is now kind of a done deal. Unless there's anything that you see that could derail that.
- [14:48]
Greg Ip
Not that I can see, Kelly. I think the big question, as we've been discussing, is whether Powell indicates whether he will give up his feet on the board at the same time that he steps down his chair or whether he'll keep it. I mean, for what it's worth, I can see a good case for why he might want to keep it. It might actually be healthier for the institutional integrity of the Fed that he's. He's in that seat. If Trump decides to step up his
- [15:08]
Kelly Evans
attacks on Powell, just explain what you mean by that.
- [15:12]
Greg Ip
Well, for example, this investigation is on hiatus. Right. But that doesn't stop Trump or any of his appointees from restarting the investigation at some future point. If you're Powell, would you rather be facing such an investigation as a private citizen or as a sitting central banker? And you could argue that the arguments for resisting that attack, the defenses are much stronger if they can be portrayed as they almost certainly would be as an attack on the Fed's independence. And I think it also forces Warsh to basically take a stand on whether or not these attacks are merited because he will no longer just be a private citizen, he will be the head of this institution and must make a call on whether the institution is best served by resisting what appears to be a pretty politicized attack on what his predecessor did in the course of executing his duties.
- [15:58]
Kelly Evans
Would there be great, any monetary policy implications if Powell stays on and this scrutiny continues?
- [16:05]
Greg Ip
A little bit, but less than I think people think folks say, oh well, if Powell's there, it's one fewer vote for rate cuts. Powell is not a hawk and he's not a difficult individual. He, like every FOMC member, will listen with an open mind to the arguments that Kevin Wash makes. Warsh is a serious policymaker. He knows he's going to have to come to that table with data, with strong arguments, with powers of persuasion. He's not going to be able to count on people voting for him just because they were appointed by the same president that he was. And in those circumstances, if I'm right, I don't see why Powell would behave differently from any other FOMC member and therefore change the outcome of monetary policy.
- [16:40]
Kelly Evans
And if you're right, and if that is the case, then we'll see his last conference press conference as Fed chair. But potentially we could still see more of him as a Fed member, maybe giving speeches and all the rest of it too, which would be interesting. Thank you both, really appreciate it. Great to have you here today. Greg Epp and Claudia Sahm Coming up, shares of Western Digital, Sandisk and Seagate are all hitting new highs today after Seagate's results and guidance topped expectations last night. The stock is up 70% this month. The analyst who predicted this strong performance joins us next. Plus, four of the biggest stocks in the world report earnings after the close today and two of them, Amazon and Alphabet, touching all time highs today. We'll look at what the expectations are ahead with.43 minutes until the Fed decision. The Exchange the Exchange is back after this.
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- [18:07]
Announcer
This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information packed daily market Preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions and key results and statistics that may impact your trading. Download the latest episode and subscribe@schwab.com MarketUpdatePodcast or find Schwab Market Update wherever you get your podcasts.
- [18:36]
Dr. Guy Winch
Men are struggling with their mental health at some of the highest rates we've ever seen, but most aren't getting the support they need and that needs to change. I'm Dr. Guy Winch, your host for season three of the Visibility Gap presented by Cigna Healthcare. This season we're focusing on men's mental health, bringing together real stories and expert insight to explore the pressures men face every day day and why opening up can feel so difficult. Join us for the new season wherever you stream your podcasts.
- [19:07]
Kelly Evans
Welcome back. Remember yesterday when these memory names were declining on reports that OpenAI's business was falling short of expectations? Well, as you can see they are roaring back today. Seagate up nearly now 11% right on the nose bringing its year to date gain to 133%. All of this after their earnings report last night where they not only posted better earnings per share and revenue than expected expected, they reported rising profit margins and higher than expected guidance for this year. My next guest has been bullish on memory for quite a while and says demand will continue to push their growth higher. Mehdi Hosseini, a senior analyst at Susquehanna Mehdi, it's great to have you back. What are your thoughts on the quarter?
- [19:47]
Mehdi Hosseini
Well, it was pretty much in line with what we're expecting and some of these upsides to both top line and gross margin is driven by better than expected pricing trend. There is more demand than there is supply and prices are going higher and I think this is going to sustain into the second half and I think this bid and raise is going to continue. I think what Kelly, you need to be mindful. Right now we're investing a lot in large language models, but as we look into 2027, the tokenization of AI and how these tokens, the token growth is going to accelerate. It is going to have an impact and we're going to we're going to have to find means to store and move the data. I mean to that extent some of the subsectors within memory, like a flash storage is going to actually continue to do well into 27 and most likely into early part of 28.
- [20:41]
Kelly Evans
Many can you talk about the tokenization of AI. What do you mean by that?
- [20:45]
Mehdi Hosseini
So over the past couple of years we have been investing in infrastructure to house these very large language models. We have spent hundreds of billions in building out these facilities. Now, as these AI facilities that are focused on training, storing large language models is starting to become productive, they're generating output. We call these output tokens. And the token growth is actually accelerating. So as the AI machine starts to generate positive roi, we have to find a way to store the data out of these machines and we have to find a way to keep lowering the cost of the output, which is cost of token. And this is where we are in very much in unchartered territory. The token growth is accelerating, the cost of storage is accelerating. And at the same time, customers want to have a more affordable, cost effective. This is why I think the longer term flashes storage like sandisk is going to be a key building block for storing these tokens.
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Kelly Evans
If flash is a key building block for this next phase of using AI, are there any parts of the memory ecosystem that are perhaps less strongly positioned than they were for the build out?
- [22:06]
Mehdi Hosseini
Is to be determined. If I were to look into LATTER Part of 27 and 28, perhaps there is a debate as to what happens to the DRAM part of memory, what happens to the hard disk drive. And I think this is a very much a dynamic and engaging debate. I think you will find argument on both sides. But what is clear is that the flash sandisk type of storage will be in a higher demand. As to what happens to Micron versus Seagate, I think we're going to have this more intense debate later this year.
- [22:43]
Kelly Evans
Right. And I know we spoke last time where you said, you know, it might be that Seagate is the hold, you know, if you're a real long term investor, more so than a Micron, which is highly cyclical or maybe more exposed to the build out than the ongoing utilization. What other inflection points should we be thinking about? Meti, for those who once again might be shaking their heads and saying, all right, I want to get on the bandwagon, but not at the wrong time. What other inflection points are you are looking for?
- [23:07]
Mehdi Hosseini
I think the inflection point is in the technologies used to build these very sophisticated factories. We call them fabrication facilities. The cavity equipment industry is also going through a very sizable inflection point. We're setting new highs and these are the companies like Applied Material that sell the equipment used to make the DRAM or an end or to some extent hard disk drive. I think those guys also have a very much longer duration. Like six months ago we weren't so sure about the size of the market for cab equipment industry. But I think as we see more new factories being put being planned for and and Applied Material seen a pretty good order momentum you could see a visibility through 27 and 28 and again these companies are the building block Applied Material LAM research and so forth. And our topic here is Applied Material and Advanced Energy which supplies to Applied
- [24:09]
Kelly Evans
Material Lam and Amit of course I think a moment ago we showed Seagate if I'm not mistaken where you've been a neutral for the recent months. Why only a neutral and do you raise it to a buy now or no?
- [24:22]
Mehdi Hosseini
So for full disclosure I have been wrong on hard disk drive. I think the inflection point happened exactly this time last year and I had a different opinion and I was proven wrong. But looking forward I think it's the flash technology that will grow at a faster rate than hard disk drive. And this is also up to debate. But my my view companies like SanDisk should have a longer duration and should benefit the most from tokenization of AI.
- [24:54]
Kelly Evans
It's fascinating and many we appreciate you breaking it down and kind of going over all of that. Thanks for making the time.
- [25:00]
Mehdi Hosseini
Thank you.
- [25:00]
Kelly Evans
Mehdi Hosseini from Susquehanna there. Coming up, the homebuilders have quietly put together a five week win streak, but that's now in jeopardy with a fourth straight day of losses amid rising input costs and rising mortgage rates. And with about 35 minutes to go until the Fed decision. We'll get the latest housing numbers coming up right here on the exchange.
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Steve Liesman
Gut check.
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Dr. Guy Winch
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- [26:54]
Kelly Evans
welcome back to the Exchange where stocks are drifting lower ahead of the Fed decision. You can see the biggest damage in the dow down about 2/3 of 1%. Treasury yields are moving the other direction as they track the price of crude oil the two year. Keep an eye on that because the decision will move that quite a bit. 391 I mean again, again we're expecting no change. So it might be more about the press conference. No projections, no dots today, the 10 year at 440 for the first time in a month and WTI crude up to 107. That's a three week high. Brent's at 119 for WTI. This would be its first four month win streak in three years. The rubber hits the road at the pump where it's 422the national average right now. And for Brent, this is the highest level in about four years. Dom Chu has a closer look at some of the other big movers. Hi Dom.
- [27:38]
Dom Chu
All right, so Kelly, let's get you three big earnings related movers that are not related to related to memory chips. And one of them is one of the best performers in the S and P and that's Generac Holdings. The energy technology and solutions company best known for backup power generators is soaring to the tune of just about 16% right now after it reported better than expected results even with higher than expected capital expenditures. It also, by the way, boosted its net sales growth forecast for the full year. Generac was helped in part by continued momentum in its what else data center related business units. Generac holdings up 15 and a half percent from big gainer to big laggard. Shares of Terradyne right now down 17 and a half percent. The biggest decliner in the S and P dug down again after the maker of semiconductor testing equipment and robotic systems reported better than expected results, helped by stronger demand for products used in testing high end chips. Tied to AI but it gave a more disappointing current quarter forecast. Those shares are down after a by the way, blistering 320% run over the course of the past year. And we're going to end on an early afternoon jolt of caffeine via Starbucks. That coffee giant is up just about eight and a half percent right now. Now it also reported better than expected profits and revenues for its most recent quarter and it raised its full year forecast for profits and sales growth at established store locations. Those so called same store sales. CEO Brian Nichols says that higher fuel costs have not yet impacted the behavior of its customers, but it is being more conservative about its outlook relative to the strength this past quarter. KELLY so Starbucks, your jolt 8 1/4% gain. I'll send things back over.
- [29:09]
Kelly Evans
I'm no technician but but some might say that looks like a breakout. Dom I don't know. Nice pop. Dom chew. Thanks. Let's get to Contessa Brewer now for the CNBC news update.
- [29:18]
Contessa Brewer
Contessa KELLY Investigators today released a picture allegedly taken by the White House Correspondent association dinner suspect in his hotel room right before he tried to storm the ballroom. The image shows Cole Allen wearing an ammunition bag, a shoulder holster and a knife. The photos were included in a new court court filing as the Department of Justice tries to keep Allen behind bars until trial. Former Attorney General Pam Bondi will testify next month about her role handling the Epstein investigation. The House Oversight Committee says she will appear on May 29. Earlier today, Democrats said they filed contempt charges against Bondi for her failure to appear. GOP members then confirmed the deposition and accused Democrats of what they they called completely unnecessary behavior. Former FBI Director James Comey surrendered to federal authorities today following his indictment yesterday. He did not enter a plea in court and no arraignment date has been set yet. Comey was charged allegedly for making threats against the president in a social media post with a picture of seashells forming the numbers 8647. Merriam Webster defines the term 86 as to throw out or or to get rid of 47 of course return referring to our 47th president.
- [30:34]
Kelly Evans
Kelly yes, Contessa, thank you very much. Contessa Brewer. Coming up, how to trade the Mag four that are reporting earnings this afternoon. There they are on your screen. Amazon positive, the rest trading lower. But it's a one way trade according to our next guest. We have those details after this. Four of the Mag 7 stocks report after the bell today. Two of them, Alphabet and Amazon hitting new all time highs. And our next guest owns all four of them and says he'd be a buyer on any weakness. On the back of today's results. Results, let's bring in Surat Seti, managing partner at DCLA and a CNBC contributor. We thought it was going to be Gene Munster or you know who, or Dan Ives. Break out the popcorn it sounds like because it's you know, 8pm and these stocks they're, they're, they're going up till midnight.
- [31:40]
Surat Seti
Well two of them are hitting all time highs, Amazon and Alphabet. And if you look at those fundamentals of those companies they are firing all cylinders, Kelly, and they just don't have one stool each. They have many different parts that are working. In Alphabet's case it's the GPUs, YouTube and Amazon, you've got so many things now they got the satellite business as well. So I really like the fundamentals behind this and we'll have to see obviously what they say on the earnings calls but capex is up there and if the return on invested capital is there, these are companies that you want to own especially for the future.
- [32:12]
Kelly Evans
I often think of you and I'm not trying to make too much of this distinction which I don't think is really that useful but I think if you're more of a value guy kind of looking for those under love leaning against the grain a little bit but in this case, and maybe we could argue the grain had sold off the Mag 7 and the valuations were stupid, cheap and, and fine. But I mean look, these are the building blocks of the modern economy. Is there any reason not to own them? Even if we expanded it out to the other three, These are the Internet platforms. We also have Apple, Microsoft and Tesla
- [32:40]
Surat Seti
in the mix 100% and yes, I am value biased. I look at cash flows and if you look at the cash flows for all of these four, they are huge. They are not just pie in the sky. We're not talking of price to sales, we're talking about investing in the future and they're the ones in the forefront. They're going to let us know when to pull back on the capex when the data center growth is going to be coming down because they've got different levers to pull on their growth and that's what I really like about these businesses. And in Microsoft's case, you know, it's sold off quite a bit but it's still a great business and it falls into that SaaS value play too. But it's also got a great amount of cash flow which they could do buyback shares and grow. So you know, when you look at these, we're not talking about companies about a year ago when they were kind of just leading their charts and come back and now they're trading much more in fundamentals than hey, you just have to own these because everybody else does.
- [33:30]
Kelly Evans
So you'd buy any of the four this afternoon on weakness. What about Nvidia? Again that's more the chip play. What about Tesla? Lot going on there.
- [33:38]
Surat Seti
I mean we own Nvidia is our largest position and it's really, you know, now it's broken through its all time highs come back, back a little bit, around to 10 again. They're so correlated the stories amongst all these, whether you talk about semiconductors, Capex, memory chips. So we really have to see who's going to be spending the same amount of money. And I think last quarter if you saw you had some of these stocks sell off because you know we were not expecting this amount of Capex, I think that's kind of built in. So if things stay the same and you hear the stories, companies that are similar, I think these stocks could still do well down the future. Talking about Tesla, I think, you know Tesla is very different in the sense that they've got a lot of other things going on. Not as cash flow robust as the other. So really you're buying Elon Musk there than you are really buying the fundamentals of that company.
- [34:28]
Kelly Evans
So many kind of interesting movers today on earning, but how about Starbucks breaking out? You wouldn't think right now would be the time with gasoline prices where they are. But to the, the conversation we're having with Steve Odlin yesterday, maybe it still is not impactful enough to really matter. And that's more of the aspirational, it's not the low end consumer, but still.
- [34:45]
Surat Seti
Well, Brian Nichols has done a great job. I mean he's come in, he's taken the playbook that he had before. It's a team approach. If you heard him this morning talk about it as well. But if you look at Starbucks, you look at Mondelez, Coca Cola, they have executed well. The companies that are executing well, that are providing value to the customer, I think they're the ones that are going to do well in the future. And you know, as we get through this phase and nobody really knows, Kelly, we've talked about it at length. How much oil is really going to affect the consumer Right now you're not seeing it as much. So the companies that are executing that have the great brand that have the customers are still going to do it. High quality cash flow companies kind of where I think investors are being attracted
- [35:28]
Kelly Evans
to a lot of those great American franchises having a pretty great, great session. Interestingly enough, Surat really appreciate it. Thanks. We'll check back.
- [35:35]
Surat Seti
Thank you.
- [35:36]
Kelly Evans
Sarat study dcla coming up, only three components of the ITB homebuilder ETF are in the green today, despite a pickup in activity this month. We'll talk about what's dragging them down next. Welcome back. 17 minutes until we find out whether the Fed moves its overnight interest rate. But on the longer end, it's already going higher for 40 on the 10 year and mortgage rates are following suit. Diana Olek is here with the fallout that's having on the market. Hi, Diana.
- [36:15]
Dom Chu
Hey, Kelly.
- [36:16]
Diana Olek
Yeah, after basically flatlining for the last few weeks, mortgage rates moved decidedly higher today and yesterday on the news about Iran. The average rate on the 30 year fixed rose 7 more basis points to 6.45% according to mortgage News Daily. That's the highest rate since April 3rd. Mortgage rates loosely follow the yield on the 10 year treasury, which surged higher today after President Trump said he would maintain the US Naval blockade against Iran until they agreed to a nuclear deal. Now, higher rates since the start of the war had been keeping homebuyers on the sidelines. But actually, mortgage applications to buy a home did move higher last week, up 1% for the week and up 21% from the same period a year ago, according to the Mortgage Bankers Association. More supply is coming onto the housing market and rates, as I said, hadn't moved much for a while. Real estate brokerages have been reporting higher buyer traffic recently, suggesting they may have kind of digested the higher rates and the ongoing uncertainty in the economy from the war. But it remains to be seen if this latest rate surge will continue and what effect that might have on the rest of the spring housing market.
- [37:24]
Kelly Evans
Kelly, Indeed. A lot more inventory I'm noticing, but like you said, still a very many ways a standstill. Diane, appreciate it for now. Thanks. Coming up, stocks are expensive according to Citi. That doesn't necessarily mean it's time to sell, though. We'll talk about valuations right after this. Welcome back. The 10 year yield above 4.4% for the first time in a month as rising oil prices push that higher and equities down. Today, in fact, does that put equity valuations at risk more broadly? Let's ask Scott Kronert. He's the U.S. equity strategist at Citi. Scott, it's Great to have you here. It's quietly bond yields sort of the 10 year has been quietly creeping higher, stubbornly high I'd say add in the price of Brent, that's going to a new four year high today, higher now than at any point since the Iran war broke out. Do you think that we've been too sanguine about how well the equity markets in the economy have done up to this point?
- [38:41]
Scott Kroner
Kelly It's a really good question. Great being on and good seeing you. What I would say is that I don't think we're being too sanguine. I don't know also that there's been evidence to support the contention that this is going to be a fundamental issue, certainly with the Q1 reporting period. However, we need to be just aware that, you know, with roughly call it half of The S&P 500 being influenced probably more by the narrative than traditional macro indicators, it's no surprise that you're, you're seeing a lot of that growth expectation play through here year. So I think what we're keeping our eye on quite honestly is sort of a repeat of the 22 narrative which we've discussed in the past, whereby you had that oil spike back in the first part of 22, but it led to a fairly mixed second half of the year. So the point here being is that Q1 earnings are probably going to probably be a bit too early to feel the real burden of higher oil prices. But as we move forward from here into the second quarter, quarter and second half of the year, we have to be aware that that issue is out there.
- [39:46]
Kelly Evans
Am I correct, Scott, in reading that you are a little concerned about market valuations here?
- [39:52]
Scott Kroner
So the way I like to describe it is I'm not one to say buy or sell on valuations alone. I think the valuation construct always reflects earnings growth. Expectations and earnings drivers in my view tend to be the most relevant aspect to how equity markets trade. But what we're looking at right now in our work is an implied 5 year earnings growth CAGR of about 12% which is extremely high by historic standards. So again doesn't mean sell, but what it does mean is the burden of proof on fundamentals to deliver and follow through is exceptionally high versus history. And so that's an awareness that you need to have going into tonight's reports and demand as we go through the remainder of the in particular the tech part of the market.
- [40:39]
Kelly Evans
Yeah, I was going to ask about that. We just spoke with Surat Said he said for tonight the focus is and he'd be a buyer of all four of these names. He said focus on capex cash flow, advertising spend. Obviously we'll get that from Google. He said, you know, it's obvious but it will be super important for the semis. I mean these are the companies that are ultimately, you know, ordering the capex that is powering this whole move. So do you have a point of view on the Mag 7 part of the S and P as it relates to valuation?
- [41:05]
Scott Kroner
Yeah, what I would say is that what's happened over the course of this year is that in terms of traditional valuation metrics and even PEG ratios, the, the semiconductor part of the market has actually gotten very attractive. So the point here being that you've had stronger earnings growth than you actually have had price action. So the PEG ratio has, have actually come in. So we think that the picks and shovels play on the AI build out in our view continues to be probably the highest conviction component of this with a hardware area of tech also being additive to that playbook.
- [41:45]
Kelly Evans
That's fascinating. So I just want to say that again, as strong as the equity performance has been, the growth, the actual earnings and now the projections is so much stronger that the valuations look better now for semis than they have. I mean that's unbelievable.
- [42:00]
Scott Kroner
I mean the semi multiples literally when we're going into Q2, we talked about this, they had the Ford PS are corrected 10 multiple turns from six months prior going back to last fall. So I think the point here being is that what we don't think the market has priced in fully yet is the magnitude and duration that the AI build out probably still has a head fed. And so that does tie back to the hyperscalers and how aggressive they'll be with their CapEx projections. And we just have to be aware that there's going to be some sensitivity to that input. But by and large when we look at the semi component, yeah, it's had a pretty good run. Yes, it's probably due for a pause or some digestion of these gains, but probably the highest level of conviction in terms of the fundamental outlook from our perch.
- [42:49]
Kelly Evans
That's quite a statement Scott, really appreciate it. Thanks for the time.
- [42:52]
Greg Ip
You bet.
- [42:53]
Kelly Evans
Scott Kroner of Citi. And that's it for us. We're going to go early as we wait for the Fed decision in about 7 minutes time. Power lunch, Brian Sullivan and our all star panel coming up right after this. You've been listening to the Exchange, make sure you're subscribed to get each episode every day, same time, same place.
- [43:15]
Announcer
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