Inflation Data and the Fed Keep the Market's Attention

SPEAKER_1 (0:00)

To discuss the trends moving the markets, let's welcome in our next guest. Joining us, Mike Dickson, the head of research at Horizon. Mike, great to have you on the show. Thanks for taking the time to join us from the nice floor today. How are you looking at the market action that we're getting today? We got the treasury buyback announcement this morning. We just had Apple's release of the foldable iPhone, the much anticipated iPhone. We're of course waiting on our inflation data. How are you looking at what we're seeing today?

Mike Dickson (0:28)

Yeah, hi there. Thanks for having me. And one of the things, the headlines for today, of course, is that treasury announcement. And then, of course, rates kind of going in the other direction. I think one of the drivers of that is maybe some commentary from Besson. It kind of got folks a little more hopeful than what we actually got delivered today.

But as we head into, of course, inflation tomorrow and the Fed next week, I think this sets up really nicely for, while everybody's been talking about the fear of a rate hike, quite frankly, I think you could actually look at that as an opportunity to stabilize some of the volatility on the long end of the curve, simply by showing that the Fed's ahead of the curve and has control of that. Some of the longer end yield rises has been due to some uncertainty around that Fed framework. So that might go a long way to help stabilize things and something that I think could be very helpful in this market right now.

SPEAKER_1 (1:15)

So Mike, is your expectation for a hold then for a hike, or is it all contingent upon the data that we get in the inflation picture?

Mike Dickson (1:25)

Well, for sure, if we get anything remotely on the hot side, it will be certainly a done deal. I think you have to tilt slightly to the fact that we're going to have a hike next week. But the reality is, the two years trading at 4.4, whether it happens in September or later in the year, I don't think makes too much of a difference except to potentially instill some confidence that the Fed has control of at least their main mandate, which we heard from L'Arche at Jackson Hole, just to help get inflation under control.

But where it sits now, I think you have to tilt to more likely a hike here in September.

But I don't really think it much matters for equities at the moment except for that confidence issue.

SPEAKER_1 (2:05)

So if it doesn't much matter then, is the bigger risk that we should be focused on, this persistent inflation, it keeps pushing longer term yields higher, could it eventually overwhelm the strength that we're seeing in earnings?

Mike Dickson (2:21)

Well, now that you mentioned earnings, that's certainly something we have to talk about, right? And one of the byproducts of a really strong growing economy is higher interest rates. And if we just zoom out and not just look at the last couple of months, but take a little bit longer view of longer term yields, what we've seen is the real interest rate, stripping out that inflation component has been the dominant driver of the rising yields. And that's really due to the fact that there's just more productive investment opportunities available in the market. I think overall, it's a very strong sign that in spite of higher rates, you've seen such a resilient equity market. I think it's an excellent example of just how strong earnings have been. And frankly, we've come off two quarters in a row of some of the best earnings beats that we've seen in many, many years. And it's not just in AI stocks. It's not just at the top of the market. It's really broad based. And that breadth is very healthy as we head into the second half of the year. And it's something I think that we need to look for under the surface of some of the top line volatility.

SPEAKER_1 (3:19)

And Mike, how are you looking at that breadth? Because we certainly saw a major broadening in terms of performance. Do you view this as the beginning of a durable rotation away from the MegaCamp winners?

Mike Dickson (3:33)

Well, it has really been a durable rotation all year. And you've had fits and starts where you've had this handoff from the AI leaders on the hyperscale and spending side to the infrastructure play in the first half of the year. And frankly, something that we've seen so far this quarter is some of the strength and recovery in a lot of the software names, which presents a different type of company that can really take the baton as the AI theme matures. And that's companies that are going to be able to take AI, bring it down to the user basis and show that they can actually make money and drive earnings through AI actually making money off of this, not just building. And that's really important, because a lot of those fears that we saw earlier in the year that saw software sell off, I think now set up to present opportunities. We saw really strong reports from Salesforce and Intuit around this. We have Oracle and Adobe tomorrow to shed some more light. And so I think the next phase, as we look for the second half of the year here, is going to be finding these companies that are actually able to bring AI to the market and really show they're able to make money and turn this into higher operating margins and earnings and not just drive that top line revenue growth. So most importantly though, money is staying in stocks and I think that's something investors need to be aware of.