SOX Surge Adds Tech Muscle Amid AI Spending Concerns; 10-Year Yield Volatility Will Last

Sam (0:00)

Welcome back to Morning Trade Live. It's time now for the big picture. Let's welcome in the team from Charles Schwab. We are joined by Joe Mazzola, head trading strategist over at Charles Schwab, and Cooper Howard, director of fixed income research and strategy Schwab Center for Financial Research. Guys, thank you so much for joining me today. Joe, let's just start with you because after a wobbly start to the session off the back of the ugly session we saw in Asia, it looks like we're a firmer footing right now. Just talk to us about the fragility in this market right now because we were all wondering yesterday if it was going to be a dead cat bounce at recovery in semis.

Joe Mazzola (0:31)

Well, semis are leading part of the charge back. I mean, the majority of the strength, these last few trading days going back to last week, has been very much a defensive led rotation, staples, healthcare, those have been leading the way energy as well too. But today, it's interesting trade.

You mentioned the weakness off of the South Korean trade of Elise, the IPO of Elise and how that kind of made its way over into our futures markets. And even on the open, it did look like the semis were underperforming. But as you're looking right now, we've really started to see a little bounce there. We hit about 11,000 in the Sox, found some footing there and are making our way back. So at one point, IT was one of the few sectors that was down. We actually had pretty good breadth overall today. It was about two and a half, almost three to one advance decliners. But now that you're starting to get IT back into it, that could be a recipe for a nice little leg up here just because of the size of the market cap and the way that that sector makes up 40 percent of the overall S&P 500

Sam (1:43)

Coop, what about the volatility we're seeing in treasuries? I mean, you say bond the court between two narratives right now. What are they and how long do you believe the volatility could continue?

Cooper Howard (1:53)

Yeah. Thanks for having me on this morning. The two narratives that we're really seeing in the bond market that are playing out is concerns over inflation. We saw that in last week's CPI and PPI report. They obviously were above expectations. Concerning there, but also the breadth of looking at inflation is moving in the wrong direction. Just the number of components under above 3% year over year continues to be elevated. I think that that's a concern in the treasury market, but then also there's a concern over the AI trade and that potentially being a slowdown in growth.

If that ultimately does occur, then that should pull yields a little bit lower. You're seeing this narrative of yields wanting to move a bit higher due to inflation concerns, but also a flight to safety trade pulling yields a little bit lower.

In our opinion, Sam, this is something that's probably going to continue, at least for the near term. So we are expecting that the 10-year treasury is going to be a little bit more volatile. So you'll see a little bit of volatility in prices as well as yields.

Sam (2:54)

Joe, you mentioned Elise, which is probably a company that nobody had heard of until today, unless you were looking at that October 6 pricing. But it made some pretty big moves in the market last night. No doubt backed up as far as some of the valuation concerns as to how demanding that's getting, but also just how capital intensive this whole AI infrastructure build out is going to be. You've got SoftBank, CDS is obviously rallying as well.

So what are we looking for in the earnings right now to give us some reassurance about how these companies are managing to build this stuff up and how they're actually getting their hands on this money?

Joe Mazzola (3:30)

Yeah. To put things into perspective, Sam, you're talking about a $750 million market cap for that company. So not a big company, but as you mentioned, it speaks more to the spend on data, the spend on Neocloud, and Neocloud as a whole down 40 percent since the August high. So it shows that there is concern. I think what we need to really see is we need to see a path of profitability.

We need to hear the mega caps talk about how they're utilizing it. We need cash flow, all the good old valuation stuff from value investors. We're not to that point where we're looking at these as value stocks, but we do need to hear some of those ideas in terms of how do you turn this mega spend into some profitability. A few things I'll be looking for, return on invested capital. I think that's a really important component to look at. And then things like when you're talking about credit and how that continues to expand and whether or not we see things like the ability to use that cash flow that you're generating to pay off that credit. And those are really important variables that they're going to be listening to in these earnings calls.