Sector Rotation, European Politics, Currency Musings, and AI

Jeff Buchbinder:

Hello everyone, and welcome to the latest LPL Market Signals podcast. Jeff Buchbinder here, your host for today, with my friend and LPL Research colleague Quincy Krosby. Hope all of you had a nice weekend. Quincy, how are you today?

Quincy Krosby:

I am fine being here with you, and recording with our lead recorder, Neal. You can't ask for anything more, and the market's up as we do this call.

Jeff Buchbinder:

Yes. Well, I'll say. First of all, we don't give our producer Neal enough airtime, so thanks Neil for what you do behind the scenes. We appreciate it. We'd be lost without you. And secondly, yes. I guess the broad market's up, but it's a really interesting dynamic where, you know, the NASDAQ's down and the rest of market's doing pretty well. So that's actually one of the things we're going to talk about today. It is June 24, 2024. Say that 10 times fast. A lot of 24s in there. As we're recording this Monday afternoon, we hope to get this out to you by the end of the day on Monday, if not Tuesday morning. So, here's the agenda today. We are going to talk about this. I just alluded to it. The evidence of a developing rotation. You know, even though we do think that stocks overall have gotten a little bit ahead of themselves. Certainly there's a scenario where the broad indexes do okay, but we get a correction in tech and AI and semis and all of that.

Jeff Buchbinder:

So we'll recap the week, the past week, first of all. Next, Quincy's quick hits. We're going to focus on Europe and Japan for that. And then we're going to get right into AI. That's the topic of our Weekly Market Commentary for this week, which you could find now on LPL.com, where we talk about the economic impact of the AI productivity boom, and a little bit about the market impact. Our chief economist, Jeffrey Roach, did a really nice job with with that and I chipped in with a little bit of market history. So we'll get to that in a minute. But the big event of the week, Quincy, and I know you're going to have some thoughts on it, is the core PCE from the Fed. The Fed's, the core PCE, which is the Fed's favorite inflation metric. So let's get right into it and recap the week.

Jeff Buchbinder:

So stocks, holiday shorten week. The stock market was up about a half a percent, so not a big week. And we continue this theme of less breadth, right? The stock market is up, but really only a small segment of it has been doing really well, at least lately. I think probably the easiest way to see that is if you look at the bottom panel on this chart, the percentage of stocks with an RSI over 14... I'm sorry. An RSI 14 over 70, which is the overbought metric. It basically says that stocks are surging over the last 14 days. Only 4% of the S&P is actually in that category, but yet the broad index is over that 70 mark, is overbought. You know, 71 reading on the RSI 14. So yeah, it's a little bit of an interesting market to pin down. Quincy, what do you think is this? Is this just telling us that we need to roll over?

Quincy Krosby:

No. What's interesting though is that this overbought situation, we went so long with an overbought market, it took so much to just get it to be oversold. Do you remember that? And, you know, markets can do that. If it's basically at its core strong market, it can stay overbought for a long time. It could stay oversold for a long time as well. But yeah, I think you're right. This market is overbought and it's overbought in the group that is selling off today. But what we've seen, including last week is we had Nvidia leading that group down, and then buyers came right in and pushed it right back up. And what was interesting was to see it sell off at the end of the day, toward the close of the day leading the market down. Question is, will buyers come in now and resurrect the the big seven?

Quincy Krosby:

You know, we have to watch it. Markets are interesting because why can't we have mega tech coexist with the broader market? What's wrong with that? Why can't mega tech coexist with financials, with industrials, even with energy, with consumer stables now? It's almost as if it can only be one grouping or the other, and only one is going to win it appears. One group will win, and it's going to be interesting to see which one does. I mean, again, why are we seeing a sell off in Nvidia? Profit-taking, obviously. Why profit-taking now?

Jeff Buchbinder:

Yeah, it's a tough question to answer.

Quincy Krosby:

There's no answer at this point. That's the dilemma.

Jeff Buchbinder:

Some people are citing. Well, I mean, we've never seen a rise like this for a company even close to this size. The only, Cisco in 1999, early 2000 wasn't nearly this big, right? But, you know, so I guess that maybe is the best comparison. And it does tell you that, as I'm sure you've heard from others, does tell you that this market needs to take a breather, especially big-cap tech. But what's interesting to me is that you're seeing different moves from the different Mag Seven names, right? It's almost like the "Mag One" now where you know, some of these other big techs are actually doing just fine, Apple in particular while Nvidia sells off. So it's kind of like a rolling correction where different groups take or different individual names take turns selling off.

Jeff Buchbinder:

And in the end, you've got a market still near all time highs. This is a five day look in the five day column, so it does not capture the calendar week, right? Last week, recall the Juneteenth holiday. Markets were closed on Wednesday, but I still think it's instructive to look at the better performance from non-tech sectors, right? Now, Comm Services has a lot of tech in it. Actually, that proves the point right there that some of the mega-gap techs are doing just fine as Nvidia sells off. But consumer discretionary up almost two. Staples up over one. Energy up about one. Financials up a little over one. Right? The rest of the market has been doing pretty well, even as tech sells off. Not much of a sell off on this five-day look, but certainly we're getting a little bit of a selloff in tech today as we're recording this.

Jeff Buchbinder:

So we'll see. I mean, tech still has a huge lead year to date. Growth still has a huge lead year to date. We'll wait and see for a little more evidence of a rotation into value. But this looks like it might be the start of a rotation, at least outside of Nvidia. And that's kind of the first step. So turning to international, Quincy, your area of focus here. What do you think about Europe's bounce? I mean, I think the market's got more comfortable with the political uncertainty in France. What do you think?

Quincy Krosby:

Well, yeah. I mean, the Cap France has been up. They had a successful bond offering in France last week. They achieved what they wanted, the gold. And it came in just a little bit lower than that high yield differential with the German bonds. Right now, it looks as if the marine pen far right is going to win. That the left-wing block is actually going to come in second place. And Macron will come in at the last. His group will come at last that he may maintain the presidency, but he will be, he will have a legislature that is not underpinning, you know, his goals, his pro-business his pro-business goals. So what's interesting about this, and we have it could come to grips with it, is that the far right in Europe has been moving more towards a kind of Italian version of the far right where, you know, they're doing very well and they're trying to replace the older image of the far right.

Quincy Krosby:

We're seeing it in Germany. We're seeing it in France. The question is, is it a facade? I mean, the market doesn't know this. Is it a facade or are there words going to be carried out? One thing is for sure though, and that is if the far-right wins and the left wing comes in second, you're going to have a tremendous budget, a tremendous budget. Something that again, Macron is going to try in the last couple of days now to say, is this what you really want, citizens of France? You want everything to just be given to you and now you have to pay for it because it is going to be very expensive. I mean, we have that discussion here in the U.S., don't we? But this is the dilemma. This is the dilemma. And just to make it clear, one of the most important issues is the retirement issue.

Quincy Krosby:

He pushed and pushed despite the pushback literally out in the streets to get the retirement age higher. It was enacted actually as in terms of legislation. And Marine Le Pen is saying, no. We are going to adjust that. It's going to come back down. Don't you worry. It's going to come back down. That is powerful, absolutely powerful, given the resentment that the average Frenchman had for this push of pushing it higher. They saw it as elitist, and they have resented it ever since. I mean, I have been watching the polling data since it became law. So it is going to be interesting. But as you said, the cockran has been up. The bond market is not normalizing, but it's not, the yields aren't jumping higher. And maybe this is the future. So far the biggest question, and we'll end it there because we know we could go on and on. Are they going to create a moment that says, hey. Now that we're in, we don't really like the European Parliament, and we want to see some adjustments there, because after all, they have had a landslide victory within the European Parliament. That's how this all started with Macron saying, hey. You know what? Let's have a snap election to see how really powerful they are. That's what's going to be interesting.

Jeff Buchbinder:

Right? So it's a two-part snap election, I believe, June 30 and July 7. So, we'll see. I thought it was interesting that, I mean, the far-left is getting huge support too, leaving Macron, you know, in third, which is, you know, almost an assured loss. So yeah. I guess we'll have good luck there. And if it's not too extreme in terms of blowing up the budget, this actually could be fine for markets. I also think it's worth noting that the economic environment in Europe maybe has gotten a little bit better. People have gotten a little more interested in investing in Europe, I think because of the ECB rate cut. And, you know, now that the U.S. is at least showing some signs of slowing economically a little bit in terms of the market, but more economically I think there's a possibility that you get more interest in Europe.

Jeff Buchbinder:

So turning to the bond market. Over this five-day look, we had bonds down a touch, but we're still at four and a quarter on the 10-year, which is pretty much stable. I thought was interesting that preferred sit so well. LPL Research continues to like preferred as a plus fixed income sector. That was up 0.3% over this five-trading day lopk. Otherwise, you know, you have not a whole lot of movement, and that's fine. That kind of syncs up with the view of our team and Lawrence Gillum, our fixed income strategist, that bonds will be kind of range-bound from here, or at least yields from here. And we continue to operate under the assumption that we'll be between 375 and four and a quarter when we end the year. By the way, on the stock market side, we're just waiting for our pullback before we consider adding to equities. We are neutral right now, and actually probably could stay there for a little while. We'll have to see. So I guess real quick... Last thing on this page, Quincy, I want to bring up to you was oil. We gotta bounce. Is this just seasonal and inventory related? Or do you think there's another reason why? Geopolitics? Or another reason why oil spiked last week?

Quincy Krosby:

Well, it's the confluence. One is definitely seasonality. Gasoline prices were a little bit lower. And the other part of it is in terms of the Middle East, because if the Israelis ease up in Gaza there's a speculation, more than speculation that they're going to now focus on Hezbollah. And that takes them into, yet from Hamus to Hezbollah, the other major surrogate for Iran. And the deeper you get into the inner sanctum for Iran, the market gets nervous because that is the big oil producer. And, you know, anything that even suggests a disruption of supply is enough to bolster oil prices. But then again, there's one other thing I should add, and that is the hurricane season. It's supposed to be based on the meteorologists who do work for the oil companies, that it's supposed to be a particularly virulent hurricane season. And, you know whenever that happens, there's always the possibility of disruption of supply.

Jeff Buchbinder:

Absolutely. Yeah. We'll hope we don't get all-out war between Israel and Lebanon, but that is certainly a huge risk for oil in terms of affecting the Iranian production, no doubt. So let's turn to your global topics. You know, we of course talked a little bit about France, but what I'm concerned with here is does this have broader implications, Quincy, for politics in Europe, or should we just look at France as, you know, idiosyncratic? And then I want to get your thoughts on the yen. I know you talked about that a little bit this morning internally. You know, we're getting close to intervention range again, right? We've already seen what, two rounds? I think something like 60 billion U.S. maybe. Is that right? So we could get another one. These are big dollars so maybe the main question there is what impact will that have on Treasury yields?

Quincy Krosby:

Yeah.

Jeff Buchbinder:

And then I want to get your thoughts on the AI productivity boom before I walk through Jeff's slides here and the Weekly Market Commentary for this week.

Quincy Krosby:

Sure. Well, first of all, let's take a look at Europe. In the U.K., it's different, isn't it? It's the Tories, the conservatives, look like they're going to be pushed out by labor, so that looks like it's a done deal. So it's the opposite. And labor is, this group in labor tends to be a bit more, a bit more cent-centric, but also it looks as if there will be a rate cut. They hit the target of 2% the last go around. The one area that was still stubbornly inflationary was services just like in the U.S. but it looks as if they may prepare to go for a rate cut perhaps in August. They did not want to do it. Remember, their election is now, snap election, is July 4. So it is really interesting to watch what's going on in Europe.

Quincy Krosby:

Germany, the right, actually the far-right, did extremely well in the European election, a European Parliament election. But there was no snap election called. And yet the right-wing, far-right-wing leader is given the success they had in the European Parliament is making inroads, tremendous inroads. So it's spreading. But again, everyone goes back to Italy and to see what she's doing there, and she's doing very, very well there. The budget is in order. The country hosted the G-Seven meeting. So the hope is that that is the new paradigm for the far-right. We'll see. We will absolutely see. You mentioned the yen. I'll go over that. Yeah. First of all, the Japanese do not like to talk about the intervention. I mean, they were forced to acknowledge that there was an intervention, and you could almost see at the charts that April 29 was the intervention, because then we saw the yen climb higher. Then go boom, boom, boom. Go to the end of May.

Quincy Krosby:

It looks like there was another intervention, but in the midst of all of this, it was about a $63 billion total. I do want to add here. They don't do this on their own. They don't do it kind of willy nilly. The central bankers talk to one another and they, even the enemies, talk to one another from the central banks. It's really interesting because no one wants to see a major upheaval. No one wants to see some mistake in the currency markets. So for that matter, any of the markets that where the Fed, where the central banks can work in conjunction. So they are talking, you know, with the Federal Reserve, especially given that it is partially the Fed's policy of higher for longer that has pushed this interest rate differential with the Japanese. Also, Japanese's own policy is pushing this problem because they remain dovish.

Quincy Krosby:

Now, if, if the Bank of Japan announced another rate hike. They had one as they changed the policy dramatically. That would help underpin the yen. But the fact of the matter is it's getting very close to that price where we were on April 29, and we'll see if they do it. Now interesting is the PCE coming out on Friday, Personal Consumptions Expenditures index. Right now, the consensus for that is that we will see year over year, month over month, a pullback in inflation. Not tremendous, but just enough to satisfy the market and the Fed's need to see that inflation is in fact, coming down. And it hasn't. It stalled. Why is this helpful for Japan? Because if that happens on Friday, what also happens then is that the U.S. dollar could soften a bit as the market says, interesting. Maybe the Fed is going to feel more and more comfortable with a rate cut. That then pushes the dollar a little bit lower than this really high, higher for longer stance.

Quincy Krosby:

Well, no. We're not going to do it. We're not going to do it. So it's important for the Japanese. The other aspect to this, and you mentioned it, is the Treasuries. There are suggestions, particularly in the May move, that they sold Treasuries to help raise cash for that intervention. The one that came at the end of May. And then you would have to think that they would have to sell more Treasuries, and why does that matter to us? Because the Japanese are the largest foreign holders of U.S. Treasuries, and if we see more selling, what does that do? What does that do to us? Well, it means that we need to make up the difference, don't we? Because at the same time, China is actually selling their holdings. Remember at one point, China had $1.3 trillion of Treasuries, you know, across the curve.

Quincy Krosby:

And they started to sell, and it sort of landed at about 820 billion. It's now down to 700 billion. And we suspect that they want to continue selling. The question always is this. Who is going to be the buyer when we have another auction? And therefore, you know Japan is, not that they're selling all of their holdings. That's not what's happening. But little by little by little, it's coming down. And so that, you know, this is where we are very sensitive about our deficit. We need to have Japan with more holdings. We need to have everyone with more holdings from global central banks. And we need private investors coming in at our auctions. We are beholden to foreigners. We're beholden to private firms to come in and buy at auction in order to bring those yields down. If they don't, the yields go higher.

Quincy Krosby:

And that's where we are caught in this never-ending cycle of these auctions telling us who's buying, who's not buying. And the last thing we want to see is Japan being forced, in essence, to sell. So it is not just about higher for longer doing this. It is also juxtaposed to their dovish policy, right? And so, again, if the Bank of Japan were to come out at their next meeting and suggest to the market verbally, like a verbal announcement, so to speak, literally and figuratively, that we may be raising rates that could help lift the Japanese yen.

Jeff Buchbinder:

Yeah. It's, of course, mainly about the U.S. We have, you know, U.S. investors listening, although we certainly recommend some global diversification. So we always try to, you know, pull out some implications from these international developments and, you know, ask ourselves what it means for the U.S. And I'll just say, I mean, on the Treasury yields, I mean, we as a country have done just about everything we could to make these other countries not want our Treasuries, right? With what's happened with, I mean, granted, inflation's come down lately, but the deficit spending certainly has gone a little bit too far. I'm sure most of you would agree with that. And then you have inflation that has been tougher to bring down than most people thought it would, including the Fed. Including most folks in the LPL Research department, if you, you know, go back three years.

Jeff Buchbinder:

And that's made people uncomfortable buying Treasuries. And we know what's happening with trade relations between the U.S. and China. Right? And, you know, that's why you've seen a lot of selling there. That's a lot of selling. I mean, you underscore that that is a big change in that amount of U.S. Treasuries held by the Chinese. And you put all that together, and yet we still have yields at four and a quarter on the 10-year. That's in my book. That's a win for now. That doesn't mean they're always going to stay low. Four and a quarter is a pretty low level relative to history. But for now, I'm going to call that a win.

Quincy Krosby:

But Jeff, let me add one more thing here. In terms of India, because we haven't mentioned India, take a look at India and their bonds. They are being included in a JP Morgan index. They have real, they compared with some of the other emerging markets strong management of their economy and budget. And the yields are attractive and there's tremendous interest in the Indian bonds.

Jeff Buchbinder:

Yeah. And that country's markets have settled down since they had a little bit of election uncertainty themselves. It looks like Modi has, you know, brought a coalition together that people are comfortable with, and they, you know, they can continue as pro business. Pro-growth, pro infrastructure policies. So that is a market that we continue to like. Let's transition to AI and then we'll preview the week ahead, Quincy. I just want to get your high level thoughts on AI. You know, how much impact could it have and, you know, maybe how you would compare it to the internet build-out 25 years ago?

Quincy Krosby:

Well, that, you know, it's a fantastic idea. One of the things that sort of envelopes this whole AI and especially Nvidia, because we have to remember what Nvidia is. They are the infrastructure, the infrastructure for AI. And then you have the build-out, you know, with Oracle with the Broadcom. Infrastructure that helping, helping, helping make the processing that much faster. That much quicker. The question comes down to, okay. In real life, how is it being used in real life? And there's so many examples of hallucinations, and for folks who don't know what that means, it means that you'll ask AI, what do you think of this? And it comes back, and it's very clear in terms of the language, but it's all wrong. That's called hallucinations. It's all wrong. It's almost, you know, upgraded gibberish.

Quincy Krosby:

There's a lot of that going on. And then when that happens, what happens is, you know, they say, okay. We'll wait. We'll wait until this thing gets fixed up. We'll wait until it becomes better. There's a famous one, which is McDonald's having got rid of using AI for orders. And it's kind of famous. It's like, I'd like a chicken sandwich. Oh, 30 sandwiches. Yeah, I want a Coca-Cola. Oh, a Pepsi or whatever. Oh, you want 20 of those? That is what, that's how it has been interpreted. And that's, of course, part of the hallucinations that a lot of users are seeing. So they want to go back to the drawing board and say, hey. Before we go and spend a lot of money on this, let's make sure that this works.

Quincy Krosby:

Let's make sure it's okay. So you've got that going on. But we know when this started to become a thing and, by the way, it's been around for years. It's been around. IBM had a huge computer that was bought by Bell Labs. They were working on AI. However, when IBM had a discussion about AI before this big, huge move in Nvidia, they said how they were going to use it. They said, hey. This is going to be used in our customer service. It's going to be used in HR, which is really interesting. Human resources, all of that. That's how we plan on doing it. And that's really how it's going to be, initially. It's going to be in customer service. It's going to be in HR, and it's also going to be in the media. We're seeing it already, where you're going to see folks losing their jobs because AI can actually, when it's not hallucinatory, can do the job for them. That's where there is a worry. This is a saying, Jeff, that if you use AI in your job, you are next. Or, you know, not you personally, but the job that you hope is next, yeah. The more you use it.

Jeff Buchbinder:

I'd be showing my resume on the screen as you talk.

Quincy Krosby:

Yes. We haven't gone that far though. But that's really what it is. The other area that's very important is in the military. And this is why you see the U.S. government clamping down on exports to China, because, you know it's going directly to the military. And the military uses AI. They use it for the drones. It is extremely important. And the more upgraded generative AI, which means faster, more and more information that can be processed very, very quickly that is where the AI is much more sophisticated. Now, I'll add one thing that, where there's the negative. When Hamas entered Israel, and you had, you know, the beginning of this conflict, one of the big questions was, what happened to AI? Because they are supposed to have been the Israeli army, the Israeli military complex, using AI for security purposes.

Quincy Krosby:

It failed. It failed completely. And so you get back to that question. Okay. We're not talking about McDonald's orders, you know. Chicken sandwiches and, you know, Big Macs. We're talking about military. We're talking about security, and it failed. And that's something that, from what I understand from military folks who, you know, I talk to, because, you know, these are the guys I grew up with, they have said that is something that is being studied. It's not just investigated. It's being studied. How did that happen, given the prominence in the Israeli military and research in that arena? So that is particularly interesting, I think. But in our world of what we do, it is, actually going to be, you know, for every day usage. The question is, how easy is it going to be to use it?

Quincy Krosby:

Or is it going to be where? Hey, you know what? I don't really feel like using it. It makes mistakes. I'll wait. I'll wait it out. That is a question because after all of these have to be sold. You know, every earnings season, what do we always talk about? How are they monetizing AI? How is Microsoft monetizing it? How is, we know Apple, we had to wait for Apple to have their day in the sun, talking about how they were integrating AI and everything, in essence, monetizing it. So this is the key is who's buying? How much are they buying? And is it enough to compensate for the cost of all of the research and development?

Jeff Buchbinder:

Sure. I think the 20% of the overall CapEx is basically coming from big tech spending on AI. That's the whole S&P 500. So there is massive spending. We know who we're talking about, right? The Metas, the Googles, all of those folks. Microsofts, Apples. If those folks believe in it enough to spend the money they're spending, I think it's probably a good idea for us to believe in it. And what becomes really exciting is, I think about this is, you know, after the hallucinations, right? And we get the growing pains behind us, this is a really powerful technology. Now, people are going to be worried about losing jobs, but history shows that that doesn't really happen, right? You end up just re-skilling the labor force, or the labor force reskills itself, and you have new jobs, right?

Jeff Buchbinder:

We're not all farmers anymore like we were a hundred years ago. And all of that, the Industrial Revolution, same thing. People thought nobody was going to have a job anymore. And, you know, we just reinvented the economy. That that should happen again. But what gets me excited is when you talk about all companies using this. There's a productivity boom here. It's just very early stages, but it's coming. It's going to make companies more profitable, right? You're going to be able to do more without adding more people. Hopefully keep the people that you have. And that's really the theme of the Weekly Commentary this week. So I'll show you a few of the charts that we have in that piece. Again, Jeff Roach, our chief economist did this. And, you know, we had a kind of a lull of productivity, I guess over the last 20 years.

Jeff Buchbinder:

We did the internet build-out. We got a little bit of a boost in, you know, the late nineties, but then we sort of, you know, hit a lull. So I think the hope is, and frankly, I think the expectation for most people is that we'll have a little bit of an uptick here from the, you know, 1.1% average productivity gains that we saw between 2019 after seeing 70 years of 2% I don't know what the numbers were in the late nineties off the top of my head, but they were above two, particularly in, you know, those peak years of the internet build-out. So productivity boosts coming. Jeff also included this chart. It's showing the contributions of research and development and software to economic growth. And you see here, if you look at the late nineties, look at that spike. Well, we're seeing the same kind of thing again now where R&D and software is becoming a bigger and bigger piece of the economy. So this is good. This is what's going to bear fruit eventually in the form of a productivity boost. And then...

Quincy Krosby:

Oh, Jeff let me. Oh.

Jeff Buchbinder:

Yeah, go ahead and jump in.

Quincy Krosby:

I wanted to add something here. Back when the market crashed... The market crashed, and the market, this is the dot-com bubble bursting. And remember, after the dot-com, we moved into a biotech, if you remember, that was the next phase. But then it all came crashing down. I won't get into the fact that most of them did not make money, but here's the thing. It was quiet, very, very quiet. And it was, oh, what's going to happen? What happened was, suddenly all of the companies that were kind of like, not new paradigm, like old fashioned American companies were coming out little by little and by little, talking about how they were integrating the software. How they were integrating all of the technology that came about during that bubble. How they were using it in parts of their businesses, and that's how everything shifted. And suddenly, you had a whole new theme, a whole new narrative in the market.

Quincy Krosby:

And for companies, my goodness, you weren't even allowed to talk about these companies because it would make you look like a Luddite. Make you look like you didn't know what was going on with that dot-com. It was taking the technology and actually utilizing it, integrating into your everyday operations. And you know what it led to? Margin expansion. Because whenever we talk about earnings, whenever we talk about companies, it always comes down to one thing, the margins, operating margins. And it showed how operating margins increased and became healthier and healthier. And that was the new paradigm. The other new paradigm became obsolete already. They was dead. The dot-com suddenly, it then resurrects. It comes back to life, but in the way you want to see it now with AI. And that was what was so fascinating. It took time. It took time, and market was quiet. Eerie almost. And then we moved on and it became part of our personal lives. It became part of corporate America, corporate world of using all of these devices and software. That's what happened, and that's what's going to happen with AI.

Jeff Buchbinder:

Yeah. It's going to take a long time to get to a good place, you know, which is generally where mobile is right now. But it'll probably get there. And, you know, at the same time, you're probably going to have a similar market pattern where the hype gets ahead of itself and you have a correction. The market has to digest all of this spending and all of the hype. cash-richAnd we'll come back down to earth, but then the market will again realize that the prospects are really incredible for how this technology can be used. And, you know, the winners will end up making another run. So hopefully it'll be a lot smoother than it was in 2000. One of the biggest differences is this time it's the biggest, best capitalized, most cash rich companies leading the charge.

Jeff Buchbinder:

With no debt. Right. Back then, very, very different. I mean, I guess you could argue that maybe some of those balance sheets were okay. You know, the Dells or the Qualcomms or whatever. But it wasn't, the quality of those balance sheets was not even close or Cisco's. The quality wasn't even as close. It wasn't even the same zip code as what we have now. Right? With all these big techs. They're just massive, the highest quality companies that this world has really ever seen, I would argue, in terms of the financials. Right? We could criticize what some of these companies do, but I'm just talking about in terms of the financials. This is a much more resilient technology leadership than we saw in 2000.

Jeff Buchbinder:

Not even comparable. So that's a good point. I think, you know, even the valuations for the market, you know, probably get people more comfortable. If you just look at the S&P 500 PEs back then versus now. You're about five, six points cheaper now. Maybe a little bit more, something in that range. So that makes this market a little more comfortable to own. And then you have, again, the fact that the leadership is of this tech trend is higher quality. So we think anybody who's saying that because we crashed in 2000, we have to crash again. We don't buy that. Do we have to correct? Sure. You know, tech already was down 10% when the market corrected five and a half a couple months ago. So we'll probably get another one of those.

Jeff Buchbinder:

Maybe it'll be a little bit bigger this time. Nvidia's already had its correction. I mean, it may go down more. But it's already down, I think 15% in just a few days, maybe a little bit more than that. So, you know, like I said before, every part of this AI rally is taking turns, kind of taking a break and the overall market certainly took a little bit of a break a couple months ago. It looks like we're on the verge of maybe another break. So let's get to the week ahead real quick. We're running a little bit long, but we've got the core PCE this week, Quincy, what do you expect to see? Did that calm CPI tell us that maybe the PCE could be a little better than expected or is that taking too big of a jump?

Quincy Krosby:

No. I think, you know, you also had the producer price index come down. You had prices paid and some of the purchasing managers surveys. Those have come down a bit. So it looks as if there's a steady, a steady trajectory. And that's what the Fed wants to see. I mean, basically the Fed wants to see that, you know, it's not going back up. That, albeit slowly, but it's coming down in the right direction. So I think, again, it would be month over month and year over year that we expect to see in the core. It pulled back just a bit. This week, we also have the Russell Reconstitution on Friday as well, and that involves a tremendous amount of trading. A heavy volume, heavy volume of trade so it will be a really interesting day.

Quincy Krosby:

Remember, it comes, what is it? I think, every, the fourth, the fourth... It's always in June, the last Friday, the fourth, Friday in June every year. So it's actually this Friday so we're going to have that. But we're also going to have some interesting earnings. We're going to hear from FedEx. And, you know, with FedEx, it's a bellwether despite its own internal issues but their guidance about what's going on around the world is always very interesting for the market and especially because we have questions about the economy. And that helps to shed some light. We're going to hear from Nike. We'll get some, you know, interesting I think comments about the consumer. And we're also speaking of the consumer and more of the middle income consumer will be Carnival, which is the largest cruise ship operator.

Quincy Krosby:

We want to see are folks, you know, going in and saying we're going to go on one of your cruises? And I'm particularly interested in the lower end because we're seeing the lower wage earners. We know they've been under pressure, but it is now moving up to the lower middle class. We want to see what Carnival has to say. Who's going on their cruises? So that I think is going to be extremely interesting for the market. And, in addition to that, we have a number of data releases regarding housing. And we also have an onslaught of Fed speak, an onslaught of Fed speak. So I think it's going to be a very interesting week. But one thing we always talk about, Jeff, is the personal income that comes out also with the PCE and whether or not, you know, we are spending more than we actually have. So we'll see how that holds up. That that should be extremely interesting as well. We also have...

Jeff Buchbinder:

...about wages, but yeah. Go ahead.

Quincy Krosby:

Durable goods is extremely important and I look at it for one reason. Because embedded in the durable goods is capital expenditures. We want to see our companies spending money. What are they spending money on? It's a vote of confidence if we see a positive data in the durable goods report,

Jeff Buchbinder:

You're going to see some AI capital investment, I think in the next few months of capital economic releases for sure. So we'll talk more about earning season next week, but that's coming pretty quickly.

Quincy Krosby:

Oh my goodness. Yes. Thank goodness.

Jeff Buchbinder:

Yeah. We'll see what we get. I mean, these are May company reports that you just referenced, Quincy, but when we get to the June quarter reports, I think we're going to hear more about capital investment and confidence in, AI for sure. So more to come there. So we'll go ahead and wrap at that point. Again, the Weekly Market Commentary on LPL.com is about the productivity boom from AI. Really good piece from Jeff Roach. So take a look at that if you're interested. Thanks Quincy as always for joining for another LPL Market Signals. Thanks to all of you for listening. We'll be back with you next week when we'll, of course, talk earnings and much more. We'll see you then.