Welcome back. We are back with Dan Niles this morning.
I want to take a look at Magnificent 7 stocks.
That's Google, Amazon, Apple, Meta,
Microsoft, NVIDIA and Tesla. They appear to be dwindling down
to a new group of four.
Just Amazon, Meta, Microsoft and NVIDIA said to be taking
the throne here.
Dan Niles is back with me.
And Dan, you call these surviving companies the Fantastic Four.
After better than expected first quarter earnings,
I want to get your take on how you're allocating
capital in the tech sector.
There have been very few people who've seen this gain
in tech
sooner than you have, and you've allocated capital to Apple
at just the right times and have ridden that,
you know, ridden that rally.
How do you want to invest along these magnificent 7
stocks?
Yeah, I mean, the four that we like are meta
because they are using AI the best in terms of
recommending videos to you as well as monetizing the ads
that are showing up on those videos.
And that stock was one of our top picks last
year.
Obviously, it almost tripled. This year it's up another
40% or so. We love NVIDIA as well because they
are enabling AI
that stocks up over 70%
this year. Amazon is enabling companies to run AI on
their platform.
AWS and their retail business is really starting to hum
along and chew through all that excess capacity that they
built.
So we see estimates EPS doubling from calendar 23 to
calendar 25.
So we like that name.
And then Microsoft, obviously we see them gaining share and
search
where they have less than 5%
share. Google has over 90%
share and given Microsoft's investment in Open AI which produces
ChatGPT,
we see that being a benefit for them in the
future.
So those are the four that we like out of
the
Magnificent 7 as they were called,
which we now call the Fantastic Four.
I like that. But Dan,
you and I lived
throughthe.com boomandthe.com bust and I remember there was a moment
in time there when anything with the.com at the end
of it was raised,
you know it was rallying and and going to sky
high valuations even if it didn't make sense because there
was no revenue,
there was no earnings. Is is this AI euphoria similar
to that?
I mean it is and it isn't.
What you have to remember is if you
do the analogy,
Netscape Navigator, which is the first commercial Internet web browser,
came out in December of
1994. And so if you Fast forward that through March
of 96,
so the same 15 months since ChatGPT showed up,
which was the end of
2022, you've got the S&P up about
41% over those 15 months from Netscape Navigator end of
94 through March of 96.
If you look at the S&P today,
same 15 month time period from the end of
2022 to today, it's up about
37%. But you have to remember that gain
in the S&P of 41%
/ 5 years then grew to
204%. So you've still got,
I think, a long way to go because you're only
a little over a year into this AI boom.
It took five years for the Internet boom to really
hit its climactic peak and then implode.
So I don't think you've had enough time go by.
And valuations right now are also a lot more reasonable
where Cisco is trading at at its peak APE of
135 * 4 earnings, where today you've got NVIDIA trading
at 40 times earnings or 90%
revenue growth, where Cisco is growing 60%
at its peak. So I think that's why I feel
like there's more room to run here.
OK, OK, Fairpoint. But you right,
you say that for the past two years the move
in tech stocks has had more to do with the
Fed.
Their earnings that in 2022,
the Magnificent 7 went down
46% as the Fed went through the fastest rate hiking
cycle since the
1970s. And then in 2023,
the Fed stopped raising rates and investors started discounting up
to seven rate cuts.
Now we're having a debate about whether or not we're
going to get any rate cuts.
The market is expecting three rate cuts.
Yesterday Neel Kashkari said the obvious out loud that while
I'm,
you know, I, I'm, I'm penciling into rate cuts,
but maybe we'll get no rate cuts.
And I spoke with Jim Grant from Grant's Interest Rate
Observer on this program just a couple of weeks ago.
Listen to what he said,
watch this.
You're not expecting a cut in rates anytime soon.
No, I they they they they might decide that that
3:00-ish is fine,
3% inflation. Yes, it's concern over the inflation rate and
to focus on financial stability as they would define it
so. But however, I think there's also a chance for
you this year that that the Fed raises if they
are confronted
with an accelerating rate of inflation.
They feel they have no choice.
And who's to say that the
3.2% thing couldn't go up?
We have an $80.00 oil price.
No longer 70.
Yeah, and now it's close to 90.
Dan, you know Jim Grant.
So do I. He's very smart.
He says there's a chance the Fed could raise rates.
If that happens, what happens to the stock market?
Oh, if it's raised rates,
that's game over. You and I both know that I
don't think the feds going to raise rates.
But
is
is the possibility really high that they're not going to
cut three times?
Absolutely. The markets thinking right now it's a coin flip
whether they cut in June or not and it's also
a coin flip whether it's
two rate cuts or three.
And I think it's hard to argue with.
If you look at CPI,
headline CPI, it was 3%
in June of last year.
Today it's at 3.2. So it's gone sideways.
Now if you're an optimist you say yeah,
but if you look at core PCE,
which I think is ridiculous,
but that's what people look at because everybody needs energy
and everybody needs food to live.
But let's just take that outlook at core PCE.
If you look at that,
you can say if you're an optimist,
that's gone from 3.2% to 2 point five over that
same period of time from June of last year.
That, by the way, is what the Fed looks at.
So I think
you brought up earlier, hey Dan,
you know, oil's gone up a lot and rates are
really high and that could cause a recession.
That's what the Fed's thinking about Maria.
And so that's why I think we will get some
rate cuts this year.
I'm not sure if we get 3,
which I don't think we will,
but we'll have to see how this year plays out.
The way I look at my investments is I'm trying
to pick names that have nothing to do with what
the Fed's going to do.
So we talked about the four I liked.
I like those names because estimates are going up,
particularly for the three of NVIDIA,
Meta and Amazon. But I also hate three of the
other Fantastic
or the Magnificent 7 names,
which is I don't like Google
because they're losing market share and search.
I don't like Tesla because they have huge competition and
EV demand is slowing down.
And and I don't like Apple because if you look
at revenues,
they haven't grown. The March quarter of this year looks
like it's going to be flat with the March
2:45 years ago. So I think you really have to
pick stocks and it's not like last year when everything
went up,
even if you were missing numbers like Apple and Tesla
did all year,
this year those stocks are getting punished and I think
that's going to continue where earnings really matter.
So that's why I'm really looking forward to this earnings
season because I think you're going to have a lot
of blow UPS as well as companies that do very
well. Well, I think it's a great point because we're
about to get into the earnings season that's going to
dictate things.
And you say the weakest stocks within that MAG 7,
Apple and Tesla also had the worst earnings outlooks,
while the best stocks had the worst earnings outlooks.
Yeah, yeah. And. And last year,
nobody cared about that. Apple's earnings estimates for the December
quarter they reported
during last year went down 10%.
The stock rallied over 40%.
For Tesla, they went down almost 50%.
The stock went up 100%.
So this year, that's obviously not the case.
Yeah, you got to stick with fundamentals,
Art, stay right there. I'll hold that thought,
Dan. Let's get to the March jobs report is crossing
the tape right now.
Lawrence Simonetti with the breaking news.