Mike Santoli (1:51)

The session and the market. It's very difficult to dislodge one of these entrenched market narratives when you haven't gotten overwhelming evidence that you should go away from it. So I do think you have that bond Yield going down April 7, the lowest yield since then. That was basically the low in the S&P 500. We're still feeding off of I think all of the reservoir of skepticism that built up then that blast off from that point. And then I do think that, you know, everything you would read into Fed intentions are still enabling you to say it's happening as part of a normalization process. You know, the market today is not exactly all everything up. It's very mixed. It's 50, 50% up, 50% down type of day when you're leaning on some of the mega caps. That has been the game for a while. So the biggest stocks, when you have macro uncertainty, have managed to keep the S and P within sight of the highs.

Melissa Lee (2:40)

Yeah, it is nice to see Broadcom bouncing today. We had a great performance by Broadcom on Friday, but we did end the session toward the lows of the day for Broadcom. And so to see it bounce three and a half percent today is a good sign for the trade. In terms of the 10 year yield though, it's interesting if we go to 4.00%, if we break that.

Mike Santoli (3:00)

Yeah.

Melissa Lee (3:00)

You wonder if the narrative completely shifts.

Mike Santoli (3:02)

I do wonder if there is a threshold where it is sort of too low for comfort. Right. Because of what messages it's sending. This is coming at a time when a lot of people are essentially projecting into next year that the fed funds rate is going to be around 3% or even lower. And so if that's the case, if we can have confidence in that, a 4% 10 year is not crazy in terms of that yield curve spread. But you know, between here and there you're going to have to prove it multiple times that it's for the right reasons and it's not because the economy is, is in genuine trouble.

Melissa Lee (3:30)

All right, let's focus in on technology. Right now, a new report out showing that AI adoption is slowing. Apollo's chief economist, Torsten Slok says transition rates are declining for larger firms, especially at companies with more than 250 workers. Something that is not going unnoticed. Court says the AI bubble fears are getting worse. Wall street doesn't want to talk about it. Just how big of a problem is this for tech? Let's bring in Dan Niles, founder and portfolio manager at Niles Investment Management. Dan, great to have you with us.

Dan Niles (3:59)

Great to be on, Melissa.

Melissa Lee (4:01)

It certainly doesn't seem this way that there is an adoption slowdown when you go through earnings calls, when you hear what companies are saying. But there could be a difference in what they're broadcasting versus what is actually going on in terms of dollars spent. What's your take on this? Because there's always that concern that there is a pull forward, that the expectations were just being bloated to begin with and that it will catch up with this trade.

Dan Niles (4:24)

Yeah. I think the tough thing is don't confuse what stock prices are doing. With what's actually going on fundamentally, because those two things can be completely different for short periods of time. And that's what you have going on right now. You were talking earlier about, you know, the Fed cutting rates starting again that cycle on September 17th, and that's driving these stocks up. But if you listen to what is actually coming out from these companies, it paints a slightly different picture, right where remember there was a MIT study that came out that 95% of companies weren't seeing any, you know, improvement from their spending on AI. Then you get to company actions which matter more than these surveys and you go, all right, Metta, which has been absolutely killing it with their LLAMA models. Now there's talk that they're going to work with either Google or OpenAI to get Llama 5 out. And after spending like, you know, Major League baseball picture type salaries for AI researchers, they probably now restructured their team at least four times in the last six months. You know, you look at what's going on with Apple, they announced all these AI features for Siri in 2024, but it'll be probably 2026 and they're going to have to work with Open Air, probably Google following this antitrust ruling to get those features out. So you are already seeing this. And over the weekend it came out that OpenAI has sort of pushed up their revenue forecast for 2030 by about $26 billion to 200 billion. But to get that revenue increase of 26 billion, they're going to have to burn 85 billion more in cash. So the data points are definitely there. But you know, we're in this business to make money, so you have to go, all right, well do the fundamentals matter right now or is it the fact you're going to get even more easy money? The 10 year yield is going down to 4% and so this market, much like in 2021, will keep going up right up until it does. And so I think you have to look at that and in video missing on datacenter revenues and you can say, yes, but the growth was so high and all this, but they missed. So that should give you another data point. And you throw on top of that Dell or Marvell or the fact that Avago has got more ASIC revenues because companies want to cut their costs. Those all speak to the same narrative. So don't confuse the actual data with what the stock prices are doing.

Mike Santoli (6:52)

Dan, I think, you know, people who are believers, who are basically committed to this whole capex story will say, well sure, companies are not yet seeing the benefits, or they're not yet accelerating their adoption of various tools because we're not there yet and we have to build as fast as we can to get there. The markets permitted a lot of these companies, the entire infrastructure trade, to go pretty far at this point. Is there any sign that the market's going to kind of tighten the reins on that?

Dan Niles (7:20)

Well, number one, I would disagree with your premise that, you know, it's okay to not see returns. We're three years into this, Mike. Right.

Mike Santoli (7:28)

I didn't say it's okay. I'm suggesting the market's been okay with it.

Dan Niles (7:32)

Well, but again, that kind of goes back to the fact that we're looking at rate cuts coming. Right. That's been the number one driver of this market really, since COVID and you can argue since Lehman failed. Right. So, you know, you have inflation going from 1.4% to 2%, sorry, 1.4 to 7% in 2021, the S&P is up 27% because the Fed keeps telling us it's transitory. When I think a lot of people, including myself, thought it wasn't, then 2022, you admit to it, rate cut, rate hikes happen, the market gets beat up pretty good. 2023, you know, the Fed goes ahead and goes on hold this year and the markets obviously surges over 20% this year. Looks like rate cuts are coming, market starts going up. And so that's doing a lot of this driving of it. And that's why it makes it seem like people are okay with this. Because don't forget, Nvidia is down since they reported. Obviously it surged a lot off the bottom. But don't forget, like middle of last year when Microsoft, Google, Amazon, all had Capex spending going up while the revenue estimates were actually getting cut, Nvidia went flat, you know, went sideways for the last half of last year. So, you know, this is a point in time, the rate cuts in front of us. That's why if you see a lot of the things that I write, it's, you know, forget about valuations, forget about fundamentals, it's all about easy money. And the party is going to continue right up until it doesn't. My thought has been that's around Thanksgiving when we find out there has been a big pull forward in demand. But in the near term, the goal is to make money, right? And then being intellectually right, that's something that ultimately will help you make money on the other side of this by being short a bunch of stocks. And I Think we're getting closer to that. But for right now, stay long and make money.

Melissa Lee (9:26)

That's a simple message, Dan, and certainly with the Fed projected to continuing its, its rate cuts, that that could be a great one except for Thanksgiving could be around when we're going to see, you know, a lot more cuts. And I'm just wondering why you decide Thanksgiving is the time. Is it just a seasonal call at that point or shouldn't the Fed cutting rates through the end of the year, should that provide easy money through that?

Dan Niles (9:52)

Well, it should, Melissa. It's a fantastic question. I mean I've had interviews for probably the last, you know, three to six months where I've talked about this since the data has come out. But remember in Q1, I think imports within US GDP were up 38%. I think the number year over year, 38. That's a huge number. And it speaks to the fact that you have this big pull forward in demand. And we've all heard about, you know, Apple Airlifting 600 tons of iPhones to get in front of the tariffs. Consumers, myself included, have been buying things in advance because, you know, prices are probably going to go up as you get to the holiday quarter. Now the good news is that in Q2, I believe that import number was down about 30% year over year. So you worked out, worked off quite a bit of that pull forward. I think you still have some more to go. You get to Thanksgiving period. A lot of electronics retailers in particular do something like 30 to 35% of their total revenues for the year in the last two months of the year. And a good portion of that's jammed into just the five days between Thanksgiving and Cyber Monday. And so you may see disappointments because for all of us, myself included, that have bought a lot of high priced electronics products upfront or potentially automobiles, etc. You may end up with demand coming in less than you expected. And so the rate cuts may not offset that. Rate cuts work in good economic environments. But if you're in a recession like we saw in the aftermath of 2008 or 0102 after the Internet tech bubble broke, it's not going to save you. And so that's kind of why I'm looking at all the data coming in and then, you know, at some point I'm sure I'll pull the ripcord. But maybe we get lucky. And to your point, the rate cuts keep the market going higher for a bit longer.

Melissa Lee (11:42)

Dan, great to speak with you. Thank you. Dan Niles, Niles Investment Management it is.

Mike Santoli (11:47)

Worth noting that in video went up pretty much like 10x from the end of 22 into 20 while the Fed was tightening. So I mean, in other words, there are times when the Capex story can overcome whatever's happening on macro policy that that is.

Melissa Lee (12:03)

Yeah, absolutely.

Mike Santoli (12:05)

All right, we have a news alert out of Washington. Eamon Javers has that story.

Samik Chatterjee (12:09)

Mike.

Dan Niles (12:10)

That's right.

Mike Santoli (12:10)

We've got a new statement now from Rebecca Slaughter. She's the FTC commissioner who's been embroiled in this legal action with the administration over whether or not the President has the legal authority to fire her. The Supreme Court earlier today issued a stay of a lower court ruling which means that she is no longer allowed access to her office at the ftc. And in her statement just out in.

Dan Niles (12:31)

The past couple of minutes, she says.

Mike Santoli (12:32)

I respect the court's decision to enter a short term stay while it considers the administration's request for a stay pending appeal. I intend to see this case through to the end. In the week I was back at the ftc, it became even more clear to me that we desperately need the transparency and accountability Congress intended for to have at a bipartisan at bipartisan independent agencies. So Slaughter here signaling that she will continue her fight, but for now the court saying she can't go to the office.

Dan Niles (12:58)

Mike.

Melissa Lee (12:59)

All right. Amen. Thank you. Coming up, we are counting down to tomorrow's Big Apple event with a look at what to expect, what it means for investors.

Mike Santoli (13:07)

Plus Citi's US Equity strategist Scott Kroner. He will join us with his take on the tariff inflation debate and where he sees stocks going from here. The exchange is back after this. This is the EXC on CNBC.

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Register now@cnbcmakeit.com Personal Brand welcome back to the Exchange. Apple holding its biggest product launch event of the year, where it's expected to introduce a new slate of products. The event comes as the company has fallen behind in the air race. Steve Kobach is in San Francisco with a preview. What should we expect?

Steve Kovach (14:58)

Steve well, new iPhones of course, Mike. That's what happens every September. But the real question going into this event is what can bring that segment of the business back to its previous strong growth? Now we know it wasn't Apple Intelligence, which launched with the iPhone 16 last year, but look back at what usually drives big upgrade cycles. It's new hardware designs and other features like that. You can see it when the iPhone 6 here with the bigger screens launched in 2014, or the iPhone 12 when it launched in 2020 with a brand new design and 5G connections. Now Apple is expected to get back to that tomorrow with the first major new iPhone redesign since 2020. It's going to be a super thin model. The Internet has been calling the iPhone air. Now, moments ago at the Goldman Sachs Communicopia event, Verizon CEO Hans Vestberg just said he expects growth in phone upgrades this year. He was asked about Apple specifically, and an executive at a major wireless carrier told me over the weekend, customers aren't even asking for artificial intelligence when they upgrade. Instead, they want hardware features like a better camera or longer battery life, along with what this executive called eye catching new designs. Now more new designs are coming after this year. We're expecting a foldable iPhone in 2026 and a radical new redesign in 2027 to mark the iPhone's 20th anniversary. As for artificial intelligence, I wouldn't expect too much on that front. Potentially an exclusive AI feature too for this new phone lineup. But the big one is going to be the Siri AI update coming next year. And you know what else drives iPhone sales growth? Price increases. There's been so much chatter among Wall street analysts over the last several days to see if the base models first iPhone price increase is going to happen for the first time in five years, guys.

Mike Santoli (16:49)

Steve, this idea that customers are not even asking for the AI features are still focused on the hardware attributes. I wonder if that could be spun as a net positive for Apple. In other words, that they have time to figure this out. Right. I mean, at some point, AI usage will presumably occur through the phone, whether it's a specific device or not.

Steve Kovach (17:10)

Yeah, that's exactly right. It could be this blessing in disguise that Apple kind of failed to deliver on that big upgrade because they can also do it in a cheap, cheaper way now. Remember, Mike, they're talking about partnering instead of building their own AI system with this update to Siri, whether that's with Anthropic or OpenAI, Google has been mentioned there. And they can do it without spending enormous amounts of money on capital expenditures. Like their peers, they can leverage that huge ecosystem of wealthy users. 1 billion iPhone install base. So, yes, that is, that is an advantage to them. They can take their sweet time now because customers don't seem to be climbing for it the way we thought they were a year ago.

Mike Santoli (17:48)

Yeah, and the way investors were, I guess, Steve.

Steve Kovach (17:50)

All right, thanks a lot too.

Mike Santoli (17:51)

Yeah.

Melissa Lee (17:53)

So what does this all mean for Apple stock? Joining us now, JP Morgan, Samik Chatterjee. Sami, great to have you with us.

Samik Chatterjee (17:58)

Yep, thank you for having me.

Melissa Lee (17:59)

I think regardless of what Apple unveils tomorrow, Samit, the question is for a 10% revenue grower at a P E that is higher than that of Metta and Alphabet, is the stock worth it here? What are we pricing in or not? Pricing in.

Samik Chatterjee (18:14)

Yeah. I think, keep in mind, the multiple that you pay on the Apple shares are largely sort of reflection of investor confidence in the predictability of the growth. Right. With the large installed base that Apple has, with the upgrades that it drives in terms of incremental growth through that, as well as the services, which has historically grown faster than hardware, leading to a larger portion of the net income coming from the visibility that you have in services that drives the multiple. So it's fair to compare it with some of the other companies and say, okay, it's lower growth maybe than some of the other big tech companies, but you're paying for the predictability, you're paying for the resilience that comes through that installed base.

Melissa Lee (18:54)

How do you think about the upgrade cycle, Samik? I mean, without AI, there is a natural upgrade cycle of people like me who have an iPhone 11 and a cracked screen who are waiting to upgrade and the time is here. And so there's that cohort, and then there are the People who want the latest and greatest in technology, which seem to be, according to at least Steve Kovacs, and report maybe smaller than we think. So let's take those people out. Let's just say people are just upgrading because they need a new phone, they want a new camera. What kind of upgrade cycle are we looking at?

Samik Chatterjee (19:23)

Yeah, I think you're looking at more of the former, as you outline. Particularly keep in mind when you do these surveys of consumers and what is the reason that they upgrade and to Steve's point is probably third or fourth in the list of features that they're looking for. They're primarily looking for like a camera upgrade or a hardware design upgrade. People still, as a consumer, want to carry a phone that looks and feels different. And so the hardware design is still a very primary driver of what the consumer sort of attaches itself to. And now with the incremental changes that you're expecting on most of the phones, except for the air, which is the big sort of outsized refresh this year, you're going to see a lot of the cohort upgrading, going to be ones that have older phones. Not necessarily probably the cohort that has iPhone 16, but really, what with the iPhone Air, you're going to see probably a new consumer demographic which is looking for a phone that has a form factor that stands out with this current generation. That's probably where the iPhone 16 sort of cohort goes and reversed towards is they pivot towards looking at the phone that stands out from the rest of the lineup so that they can sort of carry a phone that looks and feels very different. So I think again, both cohorts participate, but probably the iPhone 16 cohort is more participating in looking at the features from the iPhone Air, whereas the older phones coming through the rest of the lineup.

Mike Santoli (20:42)

So make the idea that Apple might or might wish to take some kind of an investment, make some kind of partnership with one of the big AI model creators. Is that something you think should be a priority? Do you think that's something investors have to figure out, how that plays through the finances, or do they just sit back for a while?

Samik Chatterjee (21:03)

Yeah, it is a priority because when you do a partnership, it still takes you some time to get sort of on device LLM out that can have all the features that Apple is sort of envisioning, particularly with enhanced Siri that can essentially sort of help you integrate with the native apps. Now, keeping that in mind, I think having a partnership or signing up a partnership is of utmost importance at this time. But that said, the longer term outlook, as you said, remains that Apple is probably going to be still better placed than most of these other cloud companies in terms of the magnitude of the spending on that front. Either be it in terms of CapEx or in terms of OpEx, partnering on that front does give them a pretty big advantage. And in some of the partners that have been mentioned in the press, I think you can see there's natural synergies with some of them, particularly in terms of being able to offload some of the AI that needs to be processed from the cloud versus sort of really taking more ownership of the LLM that needs to be run on device.

Melissa Lee (22:00)

Sameet, thank you. Same Chatterjee, thank you.

Mike Santoli (22:05)

All right, coming up at Lovin and Robinhood Soaring on news they'll join the S&P 500 later this month, but what does history say about the long term impact on such a stock? We'll take a closer look next.

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Mike Santoli (23:42)

Welcome back to the exchange. Robinhood and Applovin Soaring today on news they'll be joining the S&P 500 later this month. Some of the names that have already been added this year include DoorDash, TKO, Coinbase and Williams Sonoma. So I mean a few observations here. 1. It's it's rational and understandable that these stocks get a pop even Though there was some expectation that either of these might go in and maybe the stocks have gotten juiced ahead of that. But history says once you're in, it's not as if it's somehow some formula for continued great performance for the stock. In fact, some argument that the company is getting kicked out sort of outperformed for a while, right? The index funds by 15%, 20% of all the stock. But that's kind of a one time thing. And I always like to point out Tesla has underperformed since the day it went in the S and P. It's underperformed the S and P almost five years ago. It went in. The other piece of it is you can see that the companies that the S and P committee has to choose from in terms of the size and the profitability are more volatile, expensive, somewhat more aggressive type names, right? I mean Robinhood, these are very expensive. And that was also the case in 2021. And I think that's an instructive area where you had this huge tech bull market of a lot of kind of upstart companies. And those are some of the names that went in and the performance of those stocks since then. And I also would finally note Caesars and Enphase went in in 2021. Oh well, those are the two getting kicked out. Two of those that are getting kicked out today.

Melissa Lee (25:06)

I mean there's something to the list also. I mean they, it's sort of self selecting a way. I mean the list of companies potentially added are companies that do have that momentum, that have crossed certain milestones. And so therefore, you know, you will have these companies there.

Mike Santoli (25:20)

I looked at the other very large companies outside the S&P 500 that in theory at some point could be candidates. Marvell is not in Cloudflare, Roblox, Snowflake, they probably don't meet the consistent profitability filter. That's, that's probably the biggest issue right there. But even there you're talking about some, you know, some pretty spicy names like.

Melissa Lee (25:38)

The Dow curse when you're a major.

Mike Santoli (25:41)

Thing for a while, right? So far Nvidia sidestepped it.

Melissa Lee (25:44)

Now let's get to Contessa Brewer for a CNBC news update. Contessa. Melissa, thanks. The Supreme Court sided with the Trump administration today, blocking a lower court ruling that restricted the ability of federal officers to make immigration stops in the Los Angeles area solely based on a person's race, language, job or location. All three liberal justices dissented in the ruling. Sonia Sotomayor, the first Hispanic on the court, blasted the majority saying the Fourth Amendment protections against unlawful search and seizure should protect everyone. At least 17 people were killed in Nepal today when police opened fire on protesters in Kathmandu. Tens of thousands took to the streets angered over the government's attempt to regulate access to to social media and blocked many of the world's biggest platforms. At least 145 people were also wounded, according to government officials. And the French government collapsed today after Prime Minister Francois Barou lost a vote of confidence in Parliament over his unpopular austerity budget proposal. He's the second prime minister to lose his job in the past nine months and the fourth in the last two years. French President Emmanuel Macron will have to name a new prime minister or call an election. Melissa Contessa, thank you, Contessa Brewer Coming up, markets mostly muted today as investors await this week's inflation data. How will it influence stocks and the Fed's path forward? Will ask cities U.S. equity Strategist next.

Mike Santoli (27:17)

Welcome back to the Exchange. One scenario the Fed is trying to avoid stagflation. Friday's jobs report delivered the stag and this week provides some insight or should into the inflation part. Steve Liesman is here with the latest on kind of this dirty word on.

Steve Liesman (27:34)

Yeah, we did get the stag part that was in the weak jobs report we got. We may get a little bit more of that this week too and then weeks of the question is if we get the inflation part with a variety of reports this week, an outsized increase perhaps in prices could give some Fed members pause in cutting interest rates. Maybe in September, but more likely in the months after New York. Fed inflation expectations today were stable at a somewhat elevated level. Tuesday we get those benchmark payroll revisions could show a big downdraft in prior job growth numbers. Producer prices on Wednesday, consumer prices on Thursday. August core consumer inflation ex food energy forecast at 3.1%. That's the same as July. Not bad. But it is at an elevated level. It could keep inflation about a percentage point above the 2% target. The main concern is that higher prices show up in services. Those are not tariffs. Weak job growth expected to keep the Fed's focus on the employment side of the mandate. With several Fed officials expecting tariffs to prove to be one time price increases. Soft growth should put downward pressure on non tariff goods futures market fully priced for three consecutive rate cuts at the Fed's three meetings this year with even a 10% probability of a 50 in September. That's been about pretty stable. While the September cut is probably not in doubt, barring a huge Upside inflation surprise. This week Fed officials have suggested that they may need to keep downward pressure on inflation. Staying somewhat restrictive could limit rate cuts later this year unless inflation starts heading downward in a meaningful and convincing way.

Mike Santoli (29:05)

What is the driver, if there is one that we're going to see of the services inflation? I mean, is it just kind of labor supply issues? Is it just kind of the, the momentum residually from, from what we were seeing in prior years?

Steve Liesman (29:18)

It usually is labor supply and it's a weird thing going on because you have this immigration thing happening with potential deportations. A lot of those folks were essentially employed in the service sector. Right now most Fed officials have said the labor is not going to be a source of inflation. They don't see the job market as tight enough to to do that. That's another thing that gives them comfort in cutting. But again we're going to have to watch to see that the inflation is contained and doesn't create a bigger problem. The bigger problem they have is just the optics of we're point over target, we're cutting interest rates that are we serious about our target if we do.

Melissa Lee (29:55)

See hotter goods numbers, Steve, in theory we should see more than one data point correct to believe that inflation is here and in place in a threat.

Steve Liesman (30:06)

Well, we've seen it, we've seen it in tariff goods, appliances, electronics, all sorts of things. It's been showing up there.

Melissa Lee (30:12)

But non tariff goods not.

Steve Liesman (30:13)

We've not really seen it except for that business about the services inflation where it did show up. Now I am reading some Wall street forecasters saying they think they're going to get payback or a snap back down in August from July so they're less concerned about services. But certainly Austan Goolsbee and other Fed officials have pointed out and expressed some concern about the idea for at least July it wasn't just tariff goods.

Mike Santoli (30:35)

I pointed out all the time that you know, the equity market is not anchored to a 2% target. 3% inflation longer term of the span of history is totally compatible with stocks doing fine. What's interesting is the bond market today. Yields getting compressed even as you've seen, you know, inflation stay sticky. Is it because the expectations piece is not really causing any alarms?

Steve Liesman (31:00)

Well, first of all, I don't think the stock market is anchored to any inflation number because I think what we saw in the pandemic was companies found a way to make money.

Mike Santoli (31:08)

That's right.

Steve Liesman (31:09)

No matter what the inflation was. It depends on how you know how much money people have. Can they pass along those Price increases. There may be a margin squeeze to come from this. The bond market has been really curious in this regard. They are not focusing on not demanding a higher inflation premium. They're not particularly concerned about this threat to Fed independence either.

Melissa Lee (31:27)

It's amazing.

Steve Liesman (31:28)

And I think what they're focused on is the job market and the weaker economy and where the Fed, not so much where the Fed is going as much as where they're leading the Fed to concern about that. And that's been the main, main source of what I think is driving bonds is this expectations for weaker growth.

Melissa Lee (31:44)

But then to go back to your point, the stock market doesn't care even about the bonds message, which is a concern about weaker growth because we are.

Mike Santoli (31:51)

Just not, it's deciding not to assume that that's what the message is right.

Melissa Lee (31:55)

Now, perhaps is the way looking the other way.

Steve Liesman (31:57)

But ask Mike to send you a list, as he does to me from time to time, of those industries that are affected by, by, by the tariffs.

Mike Santoli (32:06)

Yeah. And you can see 20 has absolutely administered punishment.

Steve Liesman (32:09)

And there is a thing and what we're seeing is these top stocks have really been papering over what are losses inside those industries.

Melissa Lee (32:17)

Steve, thanks, Eastman. Our next guest doesn't expect inflation to be a problem and still betting on growth in a rate cut environment. Joining us now, Scott Kroner, US Equity strategist at Citi. Scott, great to have you with us. We're speaking to Dan Niles at the top of the hour and he was saying, you know, Fed easing, that's easy money. I mean, is that the sort of environment we are in or should we be concerned about growth, the growth side of things here?

Scott Kroner (32:41)

Well, from our perch, you know, you look at the, the Fed's mandate, which is dual around employment or labor, labor conditions and inflation. And our concern for some time now has been that as we move further and further away from the, the pandemic episode, that the broader consumption pictures are pretty, pretty big issue and potential headwinds. So, you know, this has led us down the path of. Yeah, we think at some point here you need to see the Fed moving towards Fed neutral, which kind of came out in Chairman Powell's talk at Jackson Hole. The inflation data does not reflect what we would think normally of an overheated economic situation. So I think what we're looking at are ongoing, transitional transitory inflation effects that ultimately say, hey, look at, we're okay on the earnings picture here. We do think there's an emerging labor concern and we do think therefore that the Fed's in position here to go down an incremental easing cycle that ultimately, ultimately should be a net positive for risk assets. Particularly as we look ahead into 2026.

Melissa Lee (33:45)

The earnings picture looks good in large part because the earnings of the biggest companies in this, in the stock market, the big tech companies are fine, they're doing great, and they're sort of underwriting the rest of the S&P 500. Scott and so I'm wondering if there's any concern on your part that there is some sort of pull forward when it comes to I spend or anything else that that threatens this, this positive, bullish narrative surrounding the AI trade.

Scott Kroner (34:10)

Yeah, I think the trade, I think this is getting a lot of discussion is what inning are we in? Right. So I think the conventional wisdom these days is that we're probably still early innings, let's say third ish inning. And so essentially what you're looking at here is what's the market pricing in at a given point in time? Right now we're of the view that the market's getting pretty close to fairly valued around what we know or think we know around CapEx intentions, around the AI playbook. But where this ends up going from a structural perspective is if we've got room for this to continue to be a tailwind for several more years, ultimately the flow through to fundamentals is going to be very supportive of broader equity market conditions. Now, where the Fed rate angle comes in, it's the other part of the market. To your point, Melissa, that's not directly attached, that has more traditional economic sensitivity. This is why we've been talking about an expectation for a broadening component to the market. In that broadening can take three approaches. It can be into other S and P sectors away from big tech, it can be international, it can even be down cap in the US Small cap. All of those are going to have a little bit more classic sensitivity to this, to this ongoing rate cycle.

Mike Santoli (35:25)

And Scott, I guess you've seen some signs of that, right? With the small caps coming to life. And the other piece of it that a lot of folks who just try to read the market for a macro assessment will say, look, consumer Discretionary has not really given up its lead, equal weighted cap weighted, whatever you want to talk about. And then financials would seem like they wouldn't hold up as well as they have if we weren't already baking in a little bit of a pretty benign economic scenario. So, so where are we relative to where you think we're going with all that?

Scott Kroner (35:55)

Well, so I Think the way we're talking about it. And to your, to your point, Mike, and then coming back to what Melissa says, look at, I mean we get the picture. The 9% ish earnings growth expected for the S and P this year, literally your mag 7 contributing half of that. Right. So it's the rest of the index, small cap as an example. The way we're talking about it is at the end of a two year earnings recession environment that mathematically begins to set up for easier comparison to 2026 on the assumption that we don't go into classic recession conditions. Again, that's part of the way this begins to go and it's supported by the current Fed rate expectations. So the bottom line here is that when you look at the market, I think is being fairly efficient about this. But up until recently, those parts of the market that were more traditionally sensitive to interest rates, whether it's consumer discretionary, whether it's utilities, real estate, go down into small mid cap as well. They had all been laggards that are now starting to play catch up. And so essentially what we have to be sensitive to, the markets beginning to price forward this ongoing expectation for this next phase of Fed rate cuts. And so it all sort of aligns with our year end target for the S&P6, 6600, which means we're not too far away. So the playbook for us is to expect some volatility as we go from here into the, you know, next week's Fed meeting and then into Q3 earnings where we expect some volatility around expectations. That then gives us room for a year end rally as we get further into the Fed rate cut dynamic.

Melissa Lee (37:35)

Scott, great to see you. Thanks. Scott Kronert, Citi.

Scott Kroner (37:37)

You bet.

Mike Santoli (37:39)

All right, coming up, a new report shows Tesla's EV dominance in the US is declining. We have the numbers and the new EV competitors hitting the market looking to take even more share.

Melissa Lee (37:57)

Welcome back to the Exchange. New data from Cox Automotive Group showing Tesla's market share as a percent of EVs in the U.S. dropping to lows not seen since 2017. Now accounting for just 38% of EV sales, down from more than 80%. For more of the numbers and the rising competition, let's bring in Phil LeBeau.

Phil LeBeau (38:13)

Phil, Melissa, you know, you go back to 2018 when the model Y was coming out and then ultimately the Model three people said, look at Tesla's market share, it's always going to dominate this market. Well, most people knew back then it would not always dominate. In fact, look at what's happened to its market share going back to 2023. Now, this is from Motor Intelligence as well as Cox Automotive. Look at the steady decline here and you might look at this and say, well, is that because nobody's buying Teslas? Well, sales have dropped year to date. But the fact of the matter is the competition is out there. There are more EVs for sale than ever before. Take a look at General Motors. It had a monster August, in part because the EV tax credit, the federal $7,500 tax credit that goes away at the end of September. Chevy dealers, Cadillac dealers, all of the GM dealers have been pushing their EVs pretty aggressively. Their market share is now up to 14% in the month of August, according to Cox. Meanwhile, when you look at Tesla, keep in mind that the focus used to be can they continue growing their deliveries globally? Now, what you're looking at here is a bar chart showing global annual deliveries year to date. In the US they're down 9%. And as you take a look at shares of Tesla, keep in mind that the July Europe sales were down 41% at the end of the month. We'll get the Q3 deliveries. Now, they don't break it out by region, but China has also been an area where they're facing stiff competition. Bottom line is this. As you take a look at shares of gm, Ford and Toyota, over the last three months, they've been steadily moving higher. Now, they're not setting the world on fire in terms of share appreciation, but they are doing better as a number of things, including the tariff landscape, gets a little bit better understood within the investment community when it comes to automakers. But keep in mind, the federal EV tax credit, it does end at the end of September, so likely we will see another big month for EVs overall in September here in the United States. And then we see a slowdown, or at least that's the expectation.

Melissa Lee (40:13)

And Phil, how important is a new EV for BMW to compete with Tesla both in Europe as well as here in the United States?

Phil LeBeau (40:19)

Sure. Well, it's huge, but they're going to be competing on the premium side of the market. Where we're seeing stiff competition in Europe is on the entry level side of the market. Xpeng out with an announcement overnight that they have planned to roll out a $17,000 EV. Now, there are going to be tariffs in place in Europe, so that's going to limit the price or push the price up higher, but that's where the market is right now. Globally, it's the Lower end EV market, that's on fire. And that's where the competition is for BMW. Mercedes. They unveiled new ones over the weekend in Germany. That's important. The premium part is important and they should do well within the premium segment. But that's a much smaller segment than the mass market.

Melissa Lee (41:04)

But to your point, Phil, in terms of where the market is growing, I mean, there is a report, I think the Munich Auto show is going on right now. The BYD is planning to launch twice as many new EV models in Europe in the coming year, despite those tariffs that you mentioned.

Phil LeBeau (41:18)

Well, keep in mind, they are opening up a production plant in Europe which will help with that. And when, and I know it sounds like a lot when people say, well, they're going to open, they're going to roll out twice as many EVs. I think they have a very limited number right now. So you double that, you go from, I don't know, three or four EVs up to six, seven or eight. It sounds like it's, you know, doubling is huge. But the bottom line is that that BYD is taking the approach with Europe hybrids first, that's where they're picking up most of their market share because those are not tariffs when they're imported in. And then EV production in Europe, that will be gradually increasing over the next year or two, no doubt. Europe is, is the spot, the spot in the world where you're seeing the EV competition play out.

Mike Santoli (42:01)

And Phil, you know, when it comes to Tesla, you mentioned, of course, it was always part of the plan. They were the first, first movers, so they were going to have their market share come down. But there's no way Tesla is a $1.1 trillion market cap now based on the sort of, you know, fine tuning of volume estimates for EVs. Right? I mean, there's so much more as a pure.

Phil LeBeau (42:20)

Believe or not.

Mike Santoli (42:21)

Yeah, correct.

Phil LeBeau (42:23)

And you've pointed this out many times, Mike, as a pure automaker, that valuation makes no sense at all. But Elon Musk has pushed a new narrative and for the most part the investment community has bought into it, that the future is robotics and autonomous and AI as well. Put all that together. He believes that Tesla in the future will be huge in terms of robotics, huge in terms of robotaxi, and that's what investors are buying into. For the most part. Investors have kind of said, okay, the traditional auto business is going to slow down. But in terms of. You're correct, Mike. In terms of valuation, there's no way that a traditional automaker valuation that if you look at them strictly as an automaker, that this valuation makes sense.

Melissa Lee (43:05)

He's also putting his money where his mouth is. I mean, that comp package, right, outlines those goals and sort of the unprofitable areas that are the bulk of the market capitalization. So it's a little bit more believable potentially because he's tying his comp.

Mike Santoli (43:17)

I guess that's true. I almost look at it from the other way, which is that the board had to set these tremendously high targets because his hype and his audacity and his predicting things are happening really much sooner than, than they have. It's like, well, you have to define success based on anything you said in the last few years coming remotely true. Because otherwise, you know, what are we, what have we been doing here? All right, coming up, gold hitting another record. Gold miners rallying as well. So what is the better bet from here? The commodity itself or the stock? That's next. Gold prices rising to another record high today. Breaking through $3,600 an ounce. Gold has surged nearly 40% this year, building on a 20%, 27% gain in 2024. That move taking the Gold Miners ETF to new highs. That is up nearly 98% for the year. Really an acceleration in the stocks over the commodity. Maybe. That is once you've gone higher for a while that the momentum really entrenched, people look for the leverage.

Melissa Lee (44:23)

I mean it's all margin from there, right? The input costs like oil that's going, the price of energy going down. Labor probably stayed the same. But it's that margin is that incremental price in the commodity.

Mike Santoli (44:32)

It is. I mean, I know the bull case for the, for the metal itself is always there. It's a matter of how much people notice it. So we'll see if it, if it carries through for much longer from here.

Melissa Lee (44:42)

Coming up, this stock rallying ahead of the Print the name and why in rapid Fire. And do not miss our next Fast Money live event on December 11th. You'll watch the show live at the Nasdaq and get exclusive access to our Traders 2026 playbook. Scan the QR code or head on over to cnbc.com fastmoney to get your tickets. Do not miss out on your chance to trade the holidays with Fast Money. Let's catch up on a few stock stories that are on our radar. Time for Rapid Fire. First up, the long awaited IPO of Klarna. After pulling its initial ipo, the buy now, pay later company finally set to go public this Thursday at a valuation of $14 billion. The big question here, will we get another day one pop and fizzle like we've seen with Figma and Circle bullish recently? Or could this be different this time around?

Mike Santoli (45:37)

The pattern has been really clear. So you've got not just a pricing well above the range on those deals we talked about, talked about, but also a huge first day surge of demand. All the demand met at the beginning. Now all those stocks are down big, but they're not back to their offering price. So you can decide to call it a success or a fizzle.

Melissa Lee (45:54)

We are showing some of the buy now, pay later and payment stocks. And you know, there is a question about consumer robustness, ability to use these sorts of services. But with interest rates coming down, that may actually help.

Mike Santoli (46:04)

It could refresh the story a little bit. Although also a question as to whether there's any real edge here in that industry.

Melissa Lee (46:10)

Exactly. Next up, Summit Therapeutics syncing on its latest lung cancer drug trial results. In a new study, the company said patients in North America and Europe treated with the drug saw their cancer return and progress faster than patients in China. Remember, this is a drug that Summit had licensed from MKESO in China about 2022. It has since been approved in China and the data were fantastic. And this data, analysts are saying, just basically failed to validate stellar results there.

Mike Santoli (46:40)

I mean, bad news for everybody involved, the world, the investors as well. And happening at a time when other biotech is actually ripping right now because rates are down.

Melissa Lee (46:49)

All right, and here's our third topic. Oracle higher ahead of earnings tomorrow. A number of analysts raising their price target into the print. JP Morgan, Morgan Stanley and Barclays among those.

Mike Santoli (46:56)

No free cash flow this year. Market doesn't care. They believe this is one of the winners.

Melissa Lee (47:00)

The anointed ones all about cloud infrastructure.

Mike Santoli (47:02)

All right, that's going to do it for us. Thank you for watching the Exchange. Power lunch starts right now.

Melissa Lee (47:07)

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Mike Santoli (47:09)

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Melissa Lee (47:11)

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