AI Stocks Drive an Divided Market

Joining us now in studio, Kevin Gordon, head of macro research and strategy at Schwab. Kevin, great to have you with us. There are a thousand directions we can go into paraphrase one Tom Keene. Let's start here with the tech sector. Look there. The the SaaSpocalypse seems like so long ago. It does. Yes. When you when you look at the tech sector, what is animating it right now amidst all... We're here the president this morning talking about a superintelligence task force. All of that anxiety is still quite palpable. And yet You know, it's interesting. Tech sort of sat out a lot of the the summer rally and recovery that you had seen in the market. So it kinda had that reverse effect that's actually happening right now where, you know, it's pretty much the only theme. It's not the only sector, but thematically, you know, you throw in everything related to AI that's that's been holding up the market because under the surface of this market over the past couple of months, things have actually looked pretty weak. The average maximum drawdown for an S and P five hundred member since the beginning of August is 14%. Yet the cap weighted S and P five hundred is off its high by just 1%. So you've got this kind of resurgence in tech, I think, after going through this really long consolidation and churning phase where investors were maybe getting spooked a little bit by whether it was valuation concerns or all of the sort of social pushback against AI. That I think is starting to fade a little bit and now breathing a little bit more life into the sector. When it comes to inflation, you write that there is no bad weather, just bad clothing, channeling either your Midwestern self, or this is also, like, very European thing I always hear. What do you mean by that? Do we just need to code up and get over it? Yeah. Channel... Well, specifically channeling Austin Goolsby when he talks about... The Chicago Chicago Fed president when he talks about inflation and monetary policy. You know, I think this is sort of the framework we need to get used to and use for inflation in this environment because with so much of the supply shocks that are dominating the headlines, things that central banks cannot control, especially related to oil and then, you know, end products related to fuel, there's very little that a central bank can do and that rate increases can do to combat that. But I think that at some point in looking at, you know, why the Fed turned hawkish and looking at just the inflation backdrop itself, the only tool that they have in responding to their price stability mandate is is interest rates. So the idea that you have to now go through this cycle, which it may not be as aggressive as we learned from from key officials this week, especially from, you know, the vice chair and then, you know, John Williams. So I think that it's it's sort of a a new framework maybe for this environment to see how things have changed where they're not necessarily responding to demand driven inflation. Hear from John Williams again this week, Mickey Bowman, Laurie Logan, as well. No surfeit of of Fed speak happening. Yeah. There was this piece on the bloomer just about the role that he, among others, John Williams is playing as kind of doing the forward guidance for Kevin Walsh. He doesn't like it. Do do you feel the same way? I mean, do you feel like there's a lack of kind of forward looking information here, or are these guys filling in the the gap being left by the I mean, well, yes. I think they're filling some of the gap. But at the same time, I think especially after course correcting for for himself, after course correcting from that July press conference, we've actually gotten quite a bit of maybe pseudo forward guidance from him in terms of what he looks at. Now we look... You know, the the breadth of PCE components and how many are rising at a particular, you know, annualized pace. He looks at, you know, as he mentioned, some of the commodity, you know, pressures that he's paying attention to. So we have a good sense now of how he thinks about it. But, you know, even if we didn't, we would have a good sense of how the majority of the committee is thinking about it. So now you're stacking up, you know, a couple of these key voices, especially within that that Fed troika of the chair and then the vice chair and then the the New York the New York president... Fed president. Now you're getting a better sense of how they're thinking about, I think, the pace of this cycle, which I I think all else equal is actually probably the best case scenario right now. If they're gonna go maybe every other meeting, probably the best case scenario for the stock market because it's not this aggressive tightening cycle where they're trying to get, you know, growth to slow significantly or they're trying to hit the labor market. That does not necessarily seem to be the case. You like that cadence? I think so. Yeah. I think it makes sense, especially for, again, you know, even though you're in this environment where inflation is elevated, because of these supply constraints, I think they wanna make sure that they're approaching this the right way, not trying to target demand too much, especially because it's sort of an indirect way of doing so. Plus, as we learned on Friday, I don't think the jobs report was as bad as the headline suggested, but I do think that there's still this this desire part... On the part of the Fed, rightly so, to not wanna try to, you know, stunt the recovery of the labor market because it's still been a little bit of a a choppy and an uneven recovery over the past year. I'm talking about a guy named John Williams. Maybe you should say tempo and not cadence. Get it? Like, the other time again. It's Friday. It's Friday. I'm working on John Williams. With the jobs report. Yes. You also wrote the economy and inflation cannot crack until the labor market cracks. Yeah. Timing on that, what are you looking for, or you think it's gonna hold? I think... Well, you know, as we've learned in the past week, especially with the spending data that we got, you know, for August, it was a it was a significant beat relative to expectations. You know, in inflation adjusted terms, you know, point 6% month over month was was the strongest we've seen in a couple of years. So I think it gets back to the idea and the very sort of simple way of looking at the labor market of if people have jobs, they'll spend money. I mean, they'll figure out to adjust their spending if inflation is an is an issue, which it is right now. But broadly But wages aren't really keeping up. So are they gonna spend money? But I think, you know, it's it's interesting. I think that for the most part, when people get their paychecks, I'm not sure how many people are actually inflation adjusting, you know, specifically based on CPI or PCE. I bet you too. So it's that... I might. But, I mean, it's a nominal it's a nominal number. You know? It's a nominal number. So people think in terms of this is what I have to spend on necessities. This is what I have to spend, you know, for discretionary. I mean, again, they'll adjust it, I think, if some of those staples get, you know, up in price. Right. I don't think people are doing that, but I think people are paying higher rents and paying more for groceries than just the cost of living. At the same time too, I mean, I think the the drawdown in the savings rate we've seen, but also the the assist that you've gotten from asset markets doing so well and holding up so well over the past several years. I think both of those forces have been strong enough to keep that consumer engine growing. We've we've gone through, you know, a record stretch of this this split between inflation adjusted spending and inflation adjusted income growth. But a lot of that has been basically explained by the drawdown that we've seen in savings, particularly down the lower end of the of the earning and the wealth spectrum. Translating it back to companies, sort of how are they helping the consumer navigate all of that? Think of the big box retailers who have been kind of help... Helping to absorb some of the impact of tariffs, for instance. Obviously, their goal is to get people into the stores. We're looking at the holiday season. So moving away from kind of the straight AI play, looking at retails, sort of what are you seeing when you when you look at that sector? Yeah. I mean, I think that that's... It's interesting because you do have some big boxes that are trying to assist, but at the same time, we've had kinda a big flurry of of price hike announcements recently. So I think that's gonna be an interesting thing to look at from the inflation side of things because particularly for September, I mean, that's when you saw such a serious increase in diesel fuel prices. That was a 13% jump, which, you know, excluding some of the bigger swings we've seen this year, is pretty extreme relative to history. So how that filters through, you know, down to end products, I think, is gonna be crucial because now you're starting to get into... I know we're not there yet, but you're starting to inch closer to holiday season. So I've the inauguration for sale. I do. Like, I'm already getting texts from my mother about which holiday I'm coming home for. It's it's coming. Hopefully, all of them. No comment. But if you're a big retailer, you've already placed those orders. Right? So when they were hedging on consumer appetite for the end of this year, were they planning on a big spend, or were they planning on people spending less? Like, are we gonna be stuck with a glut of products at the end of year? Are we gonna have to see how everybody does? But I think, you know, and I think to the point that we were just talking about around spending, and if people have jobs, I think one of the things that at least large cap, you know, corporate America has not, you know, succumb to and really has not participated in is a is a large layoff cycle, you know, at the aggregate level. So they... In some ways, they're sort of keeping... Yes. They're keeping this labor market intact. It's happening in sectors and in rolling fashion. Really, even with the with the Friday jobs report, still, the only two sort of major impacted sectors right now have been... Especially if you look at AI specific factors have been the information industry, which is essentially tech, and then to some extent financial services. Everything else is sort broadly especially. Yes. Everything else has sort of broadly been in this recovery mode, and you haven't gone through... Even if you went through a slowdown in hiring last year, you haven't gone through a significant layoff cycle evidenced by initial jobless claims remaining so low, even continuing jobless claims. So the people who are having a harder time finding a new job, that has now rolled over to the lowest since the spring of twenty twenty three. So there is still that that engine there in terms of not a lot of layoff activity. And especially when you move up the cap spectrum for corporate America, they've been the ones that have largely been keeping that in place by holding on to their labor even if they haven't gone through massive hiring sprees. We have a minute left. There is a relentlessness to the way you and others like you talk about the importance of earnings. Earnings have come in Yes. Better than expected. Huge part of the picture here. Looking ahead to the next quarter, cyclical. It's quarterly. What are you what are you thinking as we go into the fourth quarter I do. So I... You know, I've been... I don't know who originally came up with it. I can't claim it, but someone said at some point it's no longer earning season. It's CapEx season. Uh-huh. Because that's the number that everybody focuses on. But I do think that, you know, from an expectation standpoint, especially with a lot of these mega caps and how much that CapEx number has become crucial to almost the circular nature of financing in the earnings cycle. If you do get one miss there and if budgets start to get pared back, I think that's where you could see some disruption, you know, in in the earnings earnings picture, especially because we started this year at calendar year earnings estimates at 15 for the S and P. They're now up to 35%.