The question I think on everyone's mind right now is: a rate hike inevitable, and if it is, how will stocks react? We'll ask the committee today. We'll also be joined in a bit by Altimeter's Brad Gerstner as he now weighs in on the great AI debate. Joining me for the hour today: Jenny Harrington, Jim Leventhal, Shannon Sakosa, Kevin Simpson. Take you to the markets here. We are decidedly green, as you know, across the board today. There's the Dow and the S&P and the NASDAQ, all good for better than 1%. We're pretty much brushing off that hotter-than-expected core CPI. Rate hike odds now go to 86%. They were 71% before the print. Dare I say it's almost as if the market wants a hike, thinks it's getting a hike, and is actually fine if it does get a hike. And it's almost as if if the Fed doesn't hike, stocks are going to have a problem, Jim, rather than the other way around.
Yeah, because I think it sounds crazy to say it, but is that where we are? Yes. Yes, we are. And I think, you know, the reaction function that you're looking for on next Wednesday, if the Fed does raise rates, which is highly the probable case, is that long rates come down. I mean, that's really what the market's looking for, is that the bond market says, 'Okay, the Fed's on the case.' You know, and if they don't, I think you're going to see yields spike higher. Now, in terms of the equity market response, it's worth noting that usually it's not the first rate hike that does in the equity markets. Usually the equity market takes that in stride. It's when you get further in and the market realizes that the Fed's way behind the curve that the equity markets start to fall out of bed. I don't think that's going to be the case right now because we have to understand that this may not be so much an overheating economy that the Fed is attacking. Yes, it is with regards to AI buildout, but the other factors here are ones that could be temporary. May be temporary, the effect on energy of the war with Iran, tariffs, that will have to play out. But the equity markets next week are likely to look at this as, you know, a preventative measure, not something where the Fed is saying, 'Oh my gosh, we're behind the curve and we're going to have to raise massively.'
Bank of America today says time to hike, probably. We don't think the Fed can credibly stay on hold. Now they have an out-of-consensus call and they admit that the Fed will hike by 75 basis points this year, starting next week. Barclays today says better hike than wait. Professor Jeremy Siegel of the Wharton School was on Closing Bell with me yesterday. He says he thinks the Fed should and will. And then I asked him, well, how's the market going to react? Here's what he said.
I think the market will first shudder and you'll see a selloff. And if, as I expect, that long bond reacts positively, saying, 'Okay, the Fed is credible at fighting inflation. We're going to get a recovery in the stock market.'
All right, that's the professor. Jenny, is he right? Is he right?
I don't think so. I don't think he's right that the market will shudder. And the reason being, if there's 88% odds right now of it already happening, the market's already digested it. And I think that's where we're at. I think the credibility is huge. And we all know you generally just don't raise rates when the economy is weak. So you've got great Feds staying credible, markets already digested it. Why are they raising? Because the economy is strong. That's okay. You know, it's not great, but it's okay. It's for the right reasons. So I think we roll with it.
I don't think we shudder. You don't even think... I mean, we may shudder. His point was we could shudder for a little bit. When it happens, maybe we've already shuddered. Maybe we've been like a little shuddering this week. There's always volatility in those final two hours. I'm sorry, Shannon. Go ahead.
86% chance now that we're going to get a hike. Do you think I described this in the right way off the top, that it's as if now the market wants the hike, can deal with the hike, and if the Fed doesn't hike, that's where the problem in the bond market especially is going to be, and then that could lead to the problem in the stock market that doesn't have to exist?
I think that's a great summary of the situation. And I think, from Jenny's perspective, the last couple of days there has been positioning coming into this announcement. When you saw PPI, you expected CPI to also be probably a little bit hotter based on those underlying dynamics. The other thing is, Scott, if they don't go in September, they're likely not going to go in October, right ahead of the election. And so I think that that credibility comes back to just going back to all the conversations we had about wars. Is he credible? Is he going to do what he needs to do to keep us on the right path from an inflationary standpoint? The other thing is that the rationale for this is that Powell and crew cut rates three times, anticipating a more meaningful deterioration in the labor market, and we've seen labor market stabilization and broadening. And so I do think that this puts us back into perhaps the right positioning from a restrictiveness standpoint. I also think that there's going to continue to be a lot of noise, Scott, around the AI trade and the potential for the long end of the curve becoming unanchored and putting greater pressure on what are some questions around the continued capex. And so I think that also steadies the AI tech story with an anchored ten-year, along with Bessent's work on the buybacks. I think those together will create a more stable environment, and then we get earnings season. So there's a nice kind of foundation and catalyst for a steadier equity market should we get that hike next week.
There are a lot of layers here. Like, this could be a one-and-done. Normally people would say, well, it's never usually one-and-done unless it's kind of an emergency-type situation, which obviously this is not. Hiking one time doesn't do anything to deal with the issues of inflation now, unless, like everybody has suggested here, that the one-and-done is simply a hand raise of like, we're on the case. Stop questioning our credibility. We're not going to wreck this great thing that we all think we have going in this economy, albeit softness here and some softness there. But it allows us to at least let you know that we're on the case and we're not going to ruin the story by not doing anything and letting, you know, the inflation and yields get way out of hand. Is that right? Fair?
I love it that you framed it that way because I think that's the best possible outcome. I think it's unlikely, but I think it would be terrific if they came out next week and sort of telegraphed that, hey, this is one-and-done. We talked earlier in the show about if the market wants a rate hike. I think the nuance is more that the market could handle a rate hike. I don't think we ever want one, and the economy certainly is in a position where...
I think the bond vigilantes want one.
I said the stock market. Yeah. Totally, like, for sure, a thousand percent.
They're like screaming for one.
Yeah. Well, that goes back to the point the professor made. You know, we were talking about the shudder in the beginning. I don't know that that was his most important point in the comment. I think the second part was far more relevant because what he was articulating is that if we get a rate hike next week, which I think we do — I've shifted and pivoted in my belief. I didn't think we'd get one till December, but I do think we get a rate hike next week. And I think the yield on the long end of the curve goes down because we don't need a dovish Fed, and we've all said it: we need a credible Fed. Well, that's the credibility move, that you actually make the move and then you see the 30-year, perhaps even the 10-year, who knows, which is, you know, moving closer to 5%.
Get a little bit of, let a little steam off and say, okay, like, we can deal with this because everybody keeps telling us this AI-induced economy is so strong that it's not going to kill the golden goose. At a time, by the way, where you do have money leaving the market. I think people saw September and like, okay, it's time to get cautious. They read a lot of the research that's come out. We've gone through it almost every day. Flow show from BFA, the biggest three-week outflow from equities since January of this year. So people have kind of gotten cautious as we lead up to the Fed, I think, anticipating that, hey, this could actually come, and we'll have to wait and see as to what the reaction on the other side of that is going to be. I thought we would hit what tech is doing. As tech and comms services are the two best sectors of the day. Comms services is up 2%. It's been an especially good week for Meta, which is leading after their Muse AI agent. You still have Meta.
Right. This has been a pretty pivotal couple of weeks for that stock.
No, I think so. And I think it's been interesting to see how strong it's actually turned out. But like, you know what I come back to on Meta? I always just come back to the numbers. And they're still generating huge amounts of cash. Now, yeah, they're going to spend that. So they went from five or 7% free cash flow down to zero, but it's for all the right reasons. Still only trades at 20 times. It's down like 2% on the year. So it hasn't had some big run. And you know, they're going to try and sell these paid subscriptions for Muse. I don't really know Muse. I don't know if that's going to work well or not. We'll need to see. But they just keep doing things efficiently, which is what I worried about all along. They keep being at the forefront of the curve in terms of what's coming. And you kind of need to just give them credit for getting it right and not being too — I don't know what the right word is — like, not being too aggressive.
Well, I say look at that chart, guys. Put that right back to where it was, please, because I think that tells an interesting story about what kind of Jenny's talking about.
Do you have to give them credit for getting it right? Because the market has tried, as you see on that chart, to give Meta credit for doing it right, and then look at those moves higher. Almost all of them throughout the course of this year have reversed.
And right, and the key of what you just said is throughout the course of this year, and we need to remember that Meta had a huge year last year, and I think for...
Yeah, after it had the — like, after its worst year ever, it had its best year ever.
Right, but it's also, if you remember back, you know, and it's funny because I remember talking about this with...
Pull three-year, pull back a three-year while Jenny's talking if you want.
Pull it back to a three-year. Or remember, I remember when Brad got super involved in this — when Brad got super involved in this was that '21 or '20, the stock was at like 90, you know, or 80 or something. So in the past six years, we've been up a thousand percent. It is okay for individual stocks and it's okay for the market just to consolidate. And I think that's really what's happening. I mean, they still have a huge ad growth business. The growth rates are huge. So we'll see what they do.
I think there was more questioning than consolidating, to be fair.
I know you do, but like...
No, no, I think that's the overriding view. I don't think this was merely a consolidation. It was like, do we believe in the direction that Mark Zuckerberg is taking this company? It's Shannon shaking her head. Yes. Tell me more. I think that's undoubtedly what the market was saying. This wasn't just a, hey, let's consolidate. It was like, we're not sure that we believe that they know where they're going.
We saw this — we saw the same thing when he announced sort of where they were going with the metaverse, right? Like, this is an ad spending company that makes money on eyeballs. And so if you think about going and potentially selling compute, not only does it put into question the amount of capacity that they have built up and whether that is justified or necessitated, but it also is like, well, do you even know how to do that? Because this is not core to their business in terms of selling that compute. So I do think that there were questions in terms of the execution there that remains to be seen. I think that they have managed to, over the course of the last several years, prove the haters wrong, if you will, in terms of what their execution can be. But I do think it was a question about, well, this is sort of not even adjacent to some of your current core businesses.
And then there's like — but there's different kinds of questions. Like, these are questions that people have been asking with the benefit of the doubt, I'd say, which is why you see ultimately it go sideways for the year. Whereas if they'd been skeptical, apprehensive, questioning, you would have seen it permanently trade down from 700 to, you know, 500, where it didn't. This is like, all right, you know, let's see what — let's give them a pause, let's just watch. Second on the list is Apple, which has been — this is a really — we're coming off of what will be looked at, I think, as a pivotal week given the iPhone event that they had, the foldable phone, the new other phone that they have, and all that's really riding on that, not only for the company, Jim, the new CEO. The stock's up four and a half percent this week. It's the best week since July 17th, believe it or not, remember.
Yep. Nice run-up into earnings and then evaporation.
Yep. Got now maybe this is the move that they needed. What do you think?
I think so. I think this is a delayed response to the product launch. I think people are reading reviews of the folding iPhone and saying, 'Hey, maybe this is worth the $2,000 price.' I know I'm considering it. And I really think it's that simple, that they may have the buzz going into the all-important holiday season. That's when they're going to sell these things. I do still think for people who are looking and saying, 'Should I get in the stock?' I think this is an expensive price with which to get in. I have half the market weight. That's a long-term core position. I'm unlikely to sell that except under the most dire circumstances, which we are very far from. But I do find it hard to put new money to work at a 34 times forward multiple, notwithstanding the fact that the stock does have some mojo right now.
What do you think makes more? That's — if you're going to make that statement, then you got to come back and tell me, well, I think it should be more trading at whatever. I don't hear that.
Well, okay. No, here's — well, my actions speak louder than my words then, because going back to the last earnings report roughly two odd months ago, I sold it just before then at 330. It's right at this share price now. What would I look for to get back in? Something below 300. Something that makes up for the taxes that my taxable clients will have to pay on those shares.
But you're making a valuation standpoint, not a price. Yeah. I mean, where has this historically over the last five years been a buy? It's been in the low 20s. That's where you're looking at this, and you got to scoop up as many shares as you've got. We're not going to be holding out. None of us should be holding out for what was 15 years ago when it was 13 times earnings. That's when it was looked at as just a consumer products company as opposed to — yes, I'm going to say it — an innovative company.
Yeah, I will say that. I'm thinking if you're now entering a new — not a paradigm shift, but a new environment in which they're going to start growing their revenues again by a meaningful way, and then you're backed up by the buyback, that the long-awaited AI and upgrade cycle that started to pick up steam and become more robust with the 17 is actually going to travel further than people are anticipating. Then why wouldn't you — why would the stock revert back to what you're talking about? I just painted the picture.
It may not revert back. Okay.
Why should it revert back if you're going to get now revenue growth?
Better services business upside. Let me finish. Better services business because...
Siri AI is coming. We know that.
And now you've got these new phones. People look at the Duo. They snicker at the price. But a lot of the commentary is like, not as expensive as it could have been.
And this is going to probably be better than we thought.
