Transcript
0:00 He is Fundstrat head of research. He's a CNBC contributor and he's back at post nine. Welcome back. >> Great to see you, Scott. >> Good to have you with this month that's now upon us. How are you feeling? >> Well, I know people are edging into September cautious because markets are down, oil's up, yields are up and people are talking about the seasonality. I'm going to be contrarian. I think this is a setup for actually September to be a strong month for the stock.
0:27 >> Well, I think one is that the inflation fears are likely to quell this month. We have the jobs report on Friday. Next week is August CPI and then we have, of course, the FOMC rate decision in September. I think the sequence of the those events is going to show inflation is weakening and I think the odds of September hike might actually drop to zero. >> So, are you overly are you too optimistic about this market ignoring some of the challenges that you did mention? Inflation, higher rates, higher oil, you know, more hostilities in the Middle East among other issues around the AI trade, data centers, etc.
1:05 >> Yeah, and you know, of course, it makes sense to be worried about these things, but 79,808,000 to me should be a level where investors are bullish. Like, that's really when markets top is our people are bullish, you know, these highs were made in August when people are cautious and people are cautious here. So, to me, I think there's a a wall of worry here that actually should be buyable. I mean, war concerns, as you know, have historically been buyable opportunities and the AI trade still has a lot of strengthening fund that we're seeing now.
1:33 >> it is interesting to me that you do have now a growing chorus of caution. >> Yes. >> From many different corners. Citadel Securities, Scott Rubner, I highlighted a lot of this on Halftime. I'm going to do it again because he says the near-term risk-reward has changed and he points out, say, earnings were great, but they're gone now. They're they're behind us. Retail remains a buyer, but historically they become smaller in September. Systematic exposure has rebuilt. The corporate bid is going to fade. Blackout windows come back, so you can't do the buybacks. And then after a significant collapse in volatility, now that's behind us, too. He says he would use strength to reduce exposure and add inexpensive protection.
2:18 Goes on to say not looking for a broader bearish turn, but a tactical reset. What do you make of that? >> those are all valid points. If what's interesting is I think that described a lot of the crypto trade last month. You know, vol was down, retail was smaller, and we had a violent 30% rally. Crypto, believe it or not, has historically led the S&P by roughly a month. So, I I think the setup is very similar for equities. I mean, in fact, the bottom might might even be today for equities. But >> Unless you think that the the the crypto rebound could have been for for a lot of different reasons. Intervention by the Treasury Secretary in the bond market, call you know, calls attention to a higher degree to, you know, $40 trillion deficit. That that that that whole deal.
3:05 So, why do you think that what may have been a singular moment actually actually has legs? >> Well, I think that when I look at the stock market today, I think one of the most loudest things people talk about is inflation. And the fact that inflation's been sticky. You know, we wrote about this last night that, you know, when the Fed is Fed studies have shown the core PCE might have a flaw in it because of, quote, the impact from software accessories, which is flash memory. It's accounting for a third of all the inflation excess inflation this year, but most people in their lives don't have flash memory inflation.
3:40 >> No, but they have got like gasoline tank inflation. >> Correct. So, and gasoline, you know, is unfortunately something the Fed can't control, but the other components of inflation seem to be in line. Core PCE if you adjust it is actually almost mirrored on top of CPI, which is 2.4. So, if we get a 2.4 print next week on CPI, I think the market loses its anxiousness about inflation. >> people getting too cautious too soon? I mean, cuz JP Morgan's trading desk were moving to tactically cautious neutral view. Wells Fargo, we're turning cautious on equities. Are all these people are wrong?
4:11 >> Well, as you know, they're probably not wrong, but when everyone turns cautious, that means consensus has priced in a cautious scenario. And unless the economy is about to inflect downwards, as you know, the cautiousness then creates stocks can go up on bad news. That's actually when the last sellers sold, that's when markets rebuild. >> We've talked a lot and every time I think you've been on recently this data center issue, which is now bubbled up to the to the point of feels like a boil or on the verge of a pretty steady boil.
4:42 What's the impact of that on the broader market do you think as September begins? >> it's a real issue cuz as as we talked about, it's resonating with voters. And we're seeing Republican governors are siding with that in in supporting moratoriums. I just think the AI industry needs to do a better job of explaining the benefits. And I think that's I think they've gotten the message. It is creating jobs and it's creating benefits for users. And of course, it's strategically important for the US. So, I think that this is definitely headline issues even into the midterms. But once that's behind us, I think the AI sort of return on investment story is what's important and the stocks will rebound.
5:18 >> Does it change anything about the near-term trajectory for the AI trade? You know, there's a difference obviously between how people feel about this issue and how investors should react >> Yes. >> based on how the people feel. >> Yeah. >> It feels like the trade itself has been impacted by all of the negative headlines and the polling and the rhetoric that's been out there. As Do you think so? >> Yeah, it definitely has. And I I we have to keep in mind three things. One is of course, a lot of people have made money in AI stocks, so they're going to be involved with a trade.
5:51 But there's going to be churning between bottlenecks and semis and memory and downstream ideas. I think we're going to witness churning. And of course the third is as long as this is out there multiples can't really expand. So it does sort of put a cap on it for now. >> Are you still looking for a >> >> sizable pullback before a nice rebound and and could this be what we're about to encounter? >> Well, I think we're going to get a an index level correction cuz we've had a lot of churning within AI and mags this year.
6:20 >> Mhm. >> But I think it has to coincide with bullishness and that hasn't registered yet. So I'm I'm kind of saying I think the drawdown period occurs when we start to see people bullish. That's why I'm leaning towards September being a great month for stocks. >> a I don't know a few weeks ago we were saying the opposite. We're saying like everybody's too bullish. We're asking the question, you know, is there too much optimism in the market? Is there too much complacency? What did the VIX get to like 14 >> Yeah.
6:46 >> So how can we have reversed all of that now where we're thinking well now there's all of a sudden a pickup in cautious. So that that's got to be bullish. >> Yeah, I think part of it is that sentiment hasn't aligned with positioning. For instance, margin debt shrank in July and it probably didn't rise much in August and now this month it could be weakening. So we don't have excess positioning and then the the reliable sentiment measures like AAII are still showing negative sentiment. So I think as long as people are cautious we're more likely to to be higher rather than lower.
7:16 >> let's add some voices into the conversation if we could. Let's add CNBC contributor Capital Area Planning's Malcolm Ethridge and PNC's Young Yu Ma. It's good to have both of you. I I hope you heard the conversation. Young Yu, I'll go to you. Tom obviously puts forth a contrarian view to some of the cautious takes that are out there and circulating today. Where do you come down? >> Well, I think some of the headwinds are building and that's apparent both in yields, Fed narrative, as well as what's happening now with oil and diesel prices. The question what what is priced in is a very relevant question for for sure. I think that probably one rate hike is priced in. In terms of longer-term yields, a little bit higher lift from here is priced in. Probably sticky inflation and stickier gas prices and diesel prices are priced in. So, the question I think is then where do we break from here? If it's the case that we actually break downward for inflation or oil and diesel prices, that would be positive for sure. But, there's also some risk that we break higher than what's priced in in the market here in terms of long-term yields, in terms of where the Fed direction is going to go if it does indeed raise rates in September. There tends to be a momentum of its own once the Fed starts moving in a certain direction. So, I I I think risks are two-sided here, but certainly some of these headwinds are pushing against the market.
8:37 >> I I wondered though, Young You, now the fact that earnings are out of the way and we can't talk about that every day in terms of how great they've been, we're now going to be forced to focus on the things that the market didn't want to focus on before, which was yields and higher oil prices and the fact that what was said to be a four to five week war is now past six months. And now we have even more hostilities and the price of oil back around 100 bucks or certainly seems like it's heading in that direction if the situation on the ground remains what it appears to be today. So, now we don't have the distractions that got us to where we were before. We have all these concerns.
9:18 >> Yeah, well, I I think the market is starting to think in the back of its mind is are the best days behind us? Is that big earning surge behind us? You know, every once in a while once when this type of sentiment starts to take hold, we do get some positive developments that are unexpected such as new AI developments, new technology developments. You can't rule that out here, but it is the case that we're not going to have that sort of upward surprises and strong earning stories and healthy narratives or or robust narratives coming out of companies for quite some time still.
9:50 so, we have to contend with these headwinds and see where they break. So, the inflation number is going to be very important, what the Fed does and what signals is going to be very important, and of course what's happening with inflation stickiness, oil prices is going to be day-to-day movements that the market focuses on. >> All right, Malcolm, near-term risk reward has changed, says Scott Rubner, Citadel Securities, as I mentioned with Tom already. Do you agree with that or are you on team Lee?
10:18 >> Yeah, I I I don't agree with that. I think that Tom is characterizing it appropriately. I think the temporary sentiment shift is probably very temporary. I think that all of a sudden, us caring about the fact that the Strait of Hormuz is blocked, it's been blocked for 6 months. Or we're caring about inflation spiking, it's been spiking for a year. Or all year, we've been looking at the 10-year and the 30-year yield spiking. So, I think that it's unlikely that investors are suddenly going to find religion about all of the different things that could go wrong, where you just had an earnings period that confirmed that the AI party is still rolling and you had Jensen Huang come out less than a week ago and tell us, "We've got visibility into 2028 and the growth numbers are still very strong." So, I think that realistically, this is a temporary pause.
11:05 >> But wasn't the tell in all of that that the market didn't react like you would have thought? Nvidia knocks the cover off the ball, Jensen Huang guides to 70% revenue growth into '28, longer than they've ever gone before, and what have the stocks done since? Not much. >> Yeah, but you've heard me say that Nvidia's good news is good news for everybody else and less so for them, right? That as the biggest company in the world at $5 trillion, it takes a ton for them to be able to move a one percentage point at any given moment. But you look at the shares of like an Amazon for example or Microsoft for example or an Apple. All of these companies after Q2 earnings reports have done extremely well, especially the days right after the earnings print. So I just think that it's unlikely that suddenly we're going to stop caring about that narrative and really focus on the things that we've been actively ignoring for the for the better part of a year now.
11:58 What do you think? >> I mean, I'm going to agree cuz I think Nvidia's multiple is capped. >> Agree with Malcolm? >> I do agree with Malcolm, yeah. because Nvidia's multiple has been sort of stuck in the high 20s in the low high teens low 20s. >> Scott, wasn't it like the lowest level in like 7 years going into going into the print? >> Yeah. >> I mean, it was stuck in a good place. >> That's right. And to me, it's a sentiment barometer that investors can't be that a bully about AI until, you know, Nvidia follows like a Cisco path and rerates to a multiple of the S&P. And I think that we're still quite a ways from that.
12:33 >> You you think it deserves a a higher multiple? >> Yes, because they have a recurring revenue business. their dominance in a sector and >> Based on a lot of assumptions, right? The the the the recurring revenue? >> it Yes, in some ways, Scott, cuz the future is still uncertain, but actually we can say 5 years ago we were uncertain about the future of AI and they they were dominant back then. So to me, they have a they're not getting rewarded for their ability to navigate this AI trade so successfully and really being central to that future. And and then at some point they'll be traded like an N of one company and have a high multiple.
13:06 >> to bring in another point, too, in these markets cuz I mentioned it off the opening read what's happening in cyber because we are watching software today. And that space comes off its best month since May, its fifth best month ever. Fifth best month ever for software. What a difference a few months make? Well, some key earnings loom after the bell today, including Palo Alto and Dell, are Oliver Renick working up some options action for us in those names. He joins us now from the Cboe in Chicago with more. Hi there.
13:36 >> Hey Scott, Dell earnings after the bell, arguably the AI report of the week. The stock is up 240% this year and options are pricing a 10% swing for the stock, which may seem big until you remember the shares surged 30% and 20% after its last two reports. In both those cases, the options underestimated the move and traders today might be taking notice with volume now on pace for three times the 30-day average. Worth noting, it was actually below average this morning, the stock has pulled back, options traders are pouring in. The volume is split between puts and calls, but the premium is skewed towards calls and the most bought contract across 11,000 trades today is the 450 call expiring September 18th. That's a bet that Dell can hold at least an 8% rally over the next three weeks, Scott.
14:27 >> All right, I like that look there. Oliver, thanks so much. That's Oliver Renick. Let's bring the the panel back. What do you think about the software trade right now? People try to write it off, seems like a little too early. >> That's right. I think people gave up on software thinking AI was going to eat software, but it's proving to be what we consider a downstream trade to AI and I think that the good companies are going to have new durable business models built around AI centricity.
14:54 >> Malcolm, you've got some exposure in this space, obviously. and now what do you look for with Palo Alto reporting tonight? >> Yeah, that's putting it lightly. I've got a ton of exposure here. I added considerably as the SAS apocalypse started to come up on us. and I'm glad to be vindicated in a lot of these names. Palo Alto specifically though, I'm surprised to see it trading negatively today and I'm curious if maybe the fact that it's up like 175% from its earlier its lows earlier this year and maybe the because it's trading at like 85 times next year's sales, investors are just looking and saying maybe I better take some profits here before we get the earnings print just in case it goes the wrong way.
15:35 Because looking at the week we had last week in cybersecurity names specifically, I would have expected the opposite effect. I would have expected folks to be piling into Palo Alto here. So it's a little bit curious to me.