There is no question AI is the biggest topic of discussion on Wall Street and Main Street, but is AI transforming the economy and how much risk is there with the trillions of dollars being invested in AI? My panel of financial advisors and experts give their opinion on that and how important now is the housing industry to the economy? It is all in this edition of “The Bull, The Bear and You.”
[00:00:00] Welcome to another edition of The Bull, The Bear and You as we navigate what is happening in the economy and we take a look at investing. I'm Stacy Smith and I urge you to subscribe or say that you like this podcast on whatever platform you happen to use. Well, second quarter earnings have been coming in and they are good fueling the surge for new highs in the S&P 500, the Dow and the Russell 2000. We'll discuss that. Also a discussion on whether AI is transforming the US economy.
[00:00:25] And with all the talk of AI, is the housing industry still important? We'll have some opinions coming up in this edition of The Bull, The Bear and You. And with me to talk about the economy and investing is my panel of financial advisors and experts and they are
[00:00:50] Kerry Coghill of Coghill Investment Strategies. Also with us, Frank Rossetti. Frank has his own alternative investment company, HF Management Company. Also at the table, Kim Forrest of Boca Capital Partners. And we find Jim Senigola, Fregasso Financial Advisors. Jim is a senior investment analyst for Fregasso. He is sitting in today for our regular panelist, Michael Godwin. The last time we met was about a month ago and the markets made some major moves in that month.
[00:01:16] All of the major indices continued a slide until the end of July. And then it was like a rocket was launched with the Dow, the S&P 500 and the Russell 2000 all setting new all time closing highs. The Nasdaq is close to setting another new high also. So, Kim, I will begin with you. Is it the second quarter earnings reports that fueled this surge? Probably. It's been a slamming earnings report so far.
[00:01:44] And, you know, we're coming up on the more consumer sort of items here in the next week or so. And I don't think that they're going to disappoint either. So at the beginning of the year, we thought that this quarter would show an 18 percent growth, but it showed a 23 percent growth.
[00:02:01] And over 50 percent, I think it's more like 60 percent of the firms who are reporting are showing gains over what they originally forecast, which is kind of surprising, but not terribly. You know, companies like to set a reasonable bar, which by that I mean a low bar.
[00:02:23] But regardless, all the nervousness around what's happening in the economy, the slow kind of hiring, slow firing thing that we seem to be in with respect to the labor pool. That is not apparently affecting the 500 largest companies in the world or I'm sorry, in the U.S., which are world oriented. You know, they're not just doing business here in the U.S. They are worldwide companies. So things are looking pretty good.
[00:02:54] Technology, oddly enough, has not looked so great recently. And I think that's a whole lot about A.I. But we'll we might touch on that later. But it's been a great earnings season. The only thing I have to add is that we've really seen a broadening of earnings. And I think that's helped. As Kim pointed out, really, the last decade or more has been driven by tech. Now people are starting to worry a little bit about all the capex from tech. But the beneficiaries are doing well.
[00:03:24] So all the companies involved in construction, energy. We're really seeing a lot of other sectors do well. It's nice to see that diversification is actually working right now as kind of tech has weakened. But the rest of the economy has picked up the slack. Other companies are beating and raising as well. So that broadening of earnings, I think, has helped substantially with this surge in the market.
[00:03:50] I was I was just going to add that, you know, what Jim is saying is so true. There is a broadening out. And that's important, right? Because as we start to get more clarity on how AI is going to impact companies, consumers and earnings, we're going to continue to see different sectors of the market kind of react to that.
[00:04:19] So I would say that, yes, we've had a great earnings season so far. The broadening out is really kind of due to the impact of what's happening in AI. I will just caution that when we go back and look at the Internet bubble in the late 1990s, the same thing kind of happens. So we still have to pay attention to valuation. And that's really where things start to get a little hung up.
[00:04:48] Yes, they do. And fortunately, the stock market is going up more slowly than earnings. So if this continues, which it probably won't, but should it continue, earnings might catch up and then it may not be overvalued anymore. I mean, you might as well hope it's got a long way to go, maybe a couple of years worth of great earnings growth to make it look fairly valued. Maybe at that point it might even be inexpensive. Let me ask you this question.
[00:05:18] How much of the rise in, like, say, in the earnings for the S&P 500 companies can be tagged to just a couple of companies? I mean, you've indicated it's more broad based than it was, but I read somewhere, and I may have my statistics wrong on this, that the Alphabet and Amazon contributed about, this seems odd to me, 71% of the earnings growth so far. It's true. It's true. And the reason why that is is because they are the larger companies.
[00:05:46] So any kind of gains that they have in the S&P 500, because it's market-weighted, market cap-weighted, so the big have more influence on these numbers. And actually, if you take them out, it's about 9%, but that's still a healthy growth rate over, you know, for a surprise. You mean 9% growth rate, Kim? Yeah. Of the rest of the world, the other 499.
[00:06:12] Right, as opposed to, I can't see the numbers because I don't have my glasses on, I'm vain. But I did read that. And it's still, I mean, this is a still good growth rate for, you know, an economy that has a lot of headwinds. We'll just put it that way. I don't know, oil prices, a war, whatever. Yeah, I mean, interest rates, right?
[00:06:40] Like, it's, there's, you know, and I feel like, you know, when you live through bubbles, like we all live through, and with the internet bubble, and when you study market history and look at bubbles and look at what happens, you hit this point, this FOMO point, a fear of missing out, right? Like, no one wants to be left behind.
[00:07:08] And even though we have had strong earnings and so forth, we can't lose sight of the fact that just to the point of if you take out a couple of companies, what does that do to your growth rate? Because we do have some headwinds that, you know, the other thing that happens when you're in some sort of financial euphoria, there's a book called Financial Euphoria by John Kenneth Galbraith. It's tiny, everyone should read it.
[00:07:38] You really start to rationalize your crazy thinking, right? Like, you start to rationalize valuations, et cetera. And that's when it becomes a dangerous game. So, we just want investors to have a sense of, a full sense of the picture, the good and the headwinds, so that when you're making decisions about allocation, you're not getting out of your band of risk tolerance.
[00:08:05] Because if you get out of your band of risk tolerance, what's going to happen is when we have some sort of correction, which we will, you will sell at the wrong time. That's generally what happens. And if you want to talk about headwinds, of course, everybody reads about the problems we have in the Strait of Hormuz, which 20% of the oil flows through and some percentage of the fertilizer and whatever else goes through there.
[00:08:33] They're now attacking ports and boats on the Red Sea, which might shut down the Suez Canal to some point. But in addition, with the weather that's happening in Europe, the Danube and the Rhone and the Rhine are, I mean, there are World War II boats that are starting to surf, they're starting to show because the river levels are so low. And, you know, that is a major, those are major thoroughfares for freight in Europe.
[00:09:02] And we might start seeing some supply chain problems as a result of all of this and probably think wildfires and whatever else that are affecting airplanes and what have you. And that being said, that may cause some inflationary pressure that raising interest rates won't fix. But nonetheless, prices will go up. And the only tool the government really has to fight inflation is interest rates.
[00:09:31] And if they start raising interest rates, these valuations will even look higher than they are today with 5% and 6% interest rates instead of 6% or 7% or wherever they go, if they go anywhere. And, I mean, if I were, if they were asking me what I would do, I would do nothing with interest rates. I've been saying that all year. I continue to say that. But the pressure to do something may cause them to raise interest rates. I'd like to continue with this part of the discussion.
[00:10:01] And then there was a headline recently in the Wall Street Journal on a story that said, quote, the AI boom is transforming the American economy beyond recognition, end quote. So is that the case, do you guys feel? And if so, how do you invest? You're shaking your head no, Kim. I think it's a little early, right? I think what it's doing, it's focusing everyone's attention on AI.
[00:10:26] I especially am entertained by the two biggest AI companies that keep telling us that the agents they made have escaped from the classroom and are out there being mischievous. Okay. I don't believe it. I believe somebody has encouraged them to do that because it will make them look smarter. They're doing things. Don't be manipulated by people trying to sell their product.
[00:10:56] But that being said, I think the economy may be spending money to position itself to benefit from AI. But unrecognizable? Nope. This is a pretty recognizable economy. Jim, your thoughts? Yeah, I think I agree that beyond recognition, maybe a little bit of an embellishment.
[00:11:20] But I do think, you know, there was a great article by Marc Andreessen 15 years ago, software is eating the world. I think we are moving towards that with AI. I just came from a meeting internally here. You know, we're a relatively small firm compared to the Fortune 500.
[00:11:38] But the number of tasks that AI is helping us be more productive, whether it is design or marketing or just manipulation of spreadsheets, I think it is very different than it was even six months or a year ago. So I do think AI is taking on more and more roles in the economy. And, you know, going back to the Wall Street Journal article and what we talked about, the broadening of earnings.
[00:12:03] You know, now it is all of the companies that are benefiting from the investment in AI. It's going from the NVIDIAs, the chip stocks of the world, into construction, into energy, into this enormous build out. And a lot of, you know, I know we're going to talk a little bit about housing today. There's a lot of business investment that is really driving the economy now because so much money is being put into AI.
[00:12:30] I think, you know, in terms of how you invest, the flip side of that is investing carefully. This is not the first case we've seen an economic transformation, whether it's, you know, the dot-com boom, the railroads. We don't know how long the boom will last, how long are investors going to continue to be willing to fund this boom. You know, one of the questions is where is the money coming from? Where is it going? And we still don't know where the money is going to be made, who the eventual winners and losers are.
[00:13:00] So I think there's two sides of this. Yes, the economy is changing dramatically in terms of from everything, everyday tasks to kind of business investment. But I don't think that necessarily changes how you want to invest, you know, versus how you'd want to do it five or ten years ago. You know, the diversification, the paying attention evaluations, all of that still matters. All right. I have to throw this out, and maybe Frank or Kerry will jump in on this one.
[00:13:28] That is how much risk are we looking at for this country or the world in investing in AI? It's estimated that $2.5 trillion will be invested this year. And just in the last 24 hours or so, Intel raised $20 billion, and six firms are going to supply $500 billions to NVIDIA to invest.
[00:13:54] What if these companies don't make the money on all the money that's going into investment? What will happen then? People will lose money. That's very similar. But will any of these firms go under? I mean, I guess maybe this is a bad correlation. But, you know, we just came out of that 2010 or 2009, whatever it was, with the housing bubble, not bubble, but the housing swap issue with the investment firms.
[00:14:24] Are they putting too much money into this? I mean, what is too much? I have no idea. These things have all happened before. I mean, if you look back to the dot-com thing, most of the companies that were driving the dot-com thing don't exist anymore. WorldCom and Global Crossing and all those companies that were hot stocks 25, 30 years ago don't exist.
[00:14:49] And, you know, they got absorbed and they picked whatever meat was on the bones off of them and threw the bones away. All right. And that's what will happen here. Many of the companies that we're talking about today will not exist 10, 20 years from now. Some of them, and a couple of them that we haven't heard of yet, will be the winners. All right. And that's just the evolution of all new technologies. Look at the automobile industry.
[00:15:19] You know, 100 years ago, I mean, the Auburn doesn't exist anymore. The Pierce Arrow doesn't exist anymore. The Duesenberg doesn't exist anymore. All these, and these were great cars. The cord is gone. I mean, these were great cars. All right. The guy they made a move about, Tucker, he did some innovation that's unbelievable. We're using that innovation, but Tucker doesn't exist anymore. And he lost his money. And that's what will happen.
[00:15:49] That is why when you make these investments, you call it risk. And it's a risk-reward equation that you've got to measure. How much are you willing to take for understanding that in these new things, risk doesn't mean just risk. It means risky. Yeah, Gary, your thoughts on this. Yeah, I mean, what Frank said is so true. And for these companies that are making these large investments, it's something that we talk about over and over again.
[00:16:17] What's the return on the investment going to be? And unfortunately, it kind of turns into a shiny toy that the initiatives, people are buying into the initiatives and buying into what they're developing without really looking at, you know, what's the potential return on investment. I do think that AI is changing this landscape of the economy.
[00:16:45] I think that the metrics that we'll be looking at five, 10 years from now will be different than what we look at today. I agree with Kim, you know, as we sit here in this moment, has it transformed? You know, has the economy completely shifted? The answer is no. I, you know, I don't see that. But the pace at which it's happening is you can't keep up with it.
[00:17:12] It's happening so fast that it really takes a lot of time and energy to even in our businesses to figure out number two things in our industry. One is how are we using AI to be more productive and deliver better outcomes for our clients? And what are our thoughts surrounding AI as a competitor to us?
[00:17:39] So, you know, I think every business is kind of facing this. And if you look at employment, you know, I think that AI probably right now is having its biggest impact on employment. There are things that we can do that we don't need to hire people for anymore. And that's just the reality. So when you look at our kids in college right now, you know, the things that they're doing, the things that they're studying.
[00:18:06] If you're coming out with a marketing degree, what's your competition for a job? Is it, you know, that student that was sitting next to you or is it some AI agent? So it's happening very quickly. And I think for all of us as advisors and for everyone as investors, it's just really important to keep your finger on the pulse in order to stay ahead.
[00:18:32] But to your question about risk, what Frank said, like, I couldn't agree with that more. That these companies, go back and study the dot-com bubble. And it's, in a way, history repeating itself. So I listened to the announcement of NVIDIA and its six, it's going to sound negative, enablers, funders. I'm not trying to be this negative, really.
[00:19:00] But, no, the six firms that are, you know, going to put up this $500 billion, right? Is it billion? Yeah, I think it's that. Okay, anyhow. The takeaway I got was don't worry if it's open AI dies or anthropic dies. We have other people lined up for these assets as well. I mean, it couldn't have been bigger that they are, the funders are looking for risk reduction.
[00:19:28] If they're going to build an asset, they want to make sure more than one person can use it. And that's what the CEO of NVIDIA was proposing, that they were going to help design these data centers to enable others to use them, not just the very top of the top open AI and anthropic. So I think that's an interesting tact.
[00:19:53] I don't know that I really believe it, having come from software myself. Everybody has their own kind of spin. You know, Google, they invent the whole stack. Yes, you can buy routers from Cisco, but Microsoft and Google create their own. But I'm sure they're trying to make these assets as vanilla as possible to be able to serve their investors,
[00:20:21] which are the people that are putting up the money, right? Because the money people are only really the middlemen. There are people like us that are saying, yes, I want to be a lender to these companies, right, if you're going to buy bonds. So it's a very interesting time and lovely to see somebody thinking about risk. I want to continue on about the economy and changes. And perhaps a sign the economy is changing is the housing market.
[00:20:49] In October of 2023, the 30-year fixed-rate mortgage hit 7.79 percent. Last week, that rate was 6.69 percent. So it's lower than it was in October of 23. But that also hit the highest level so far this year. At the same time, June home sales were down 2 percent. The median price of existing home was $440,600, which is the highest it has ever been.
[00:21:18] Housing was always considered a key element of this economy. But despite these depressed sales and high interest rates, for most people they feel are high at least, the economy just keeps moving along. So is it time to adjust one's thinking about how important the housing market is and the affiliated industries with the housing market for the economy? Absolutely not. It's the largest expense most people make in their life.
[00:21:49] And it doesn't matter whether they're buying a 1,200-square-foot ranch that was built in the 50s for $50,000 or $20,000 or whatever it was, or they're buying what they're building today, a 4,000-foot mega-mansion with five bedrooms, which is why it's too expensive. People are buying homes they can't afford. And lots are so expensive because everybody wants to live two seconds from their work.
[00:22:16] And the coffee shop and the grocery store, that the land is so expensive, they can't put a 1,200-square-foot thing on it. So there's a mismatch in supply and demand today that will adjust over time and has nothing to do with interest rates because these interest rates, I've been saying it for two years, are not high. These are normal interest rates. High is 8%. Low is 4%. We're at 6% for mortgages-ish.
[00:22:45] That's normal. Get used to it. What has to be adjusted is the reality that 2% was abnormal, just like Stacey when we were entering the market, 14% and 15% was abnormal. Neither of those ever happened before and probably will happen again, but probably not in my lifetime. I get irritated with those interest rates are high. They're not.
[00:23:14] That's why I put the little caveat when I said it. I mean, they're not, but they are. Relative to what people have been used to, they look at it, those who haven't been around as long as we all have, and they say they're high. So, you know, the perception is reality, right, that, you know, when you come off of a period where we've had abnormally low interest rates,
[00:23:41] they still feel high, and they still are having the same impact on a person's affordability of a home. Now, the flip side to that is that since we have seen rates come up off of these abnormal lows, we have also seen the value of homes actually simmer a little.
[00:24:05] So we're not getting that astronomical growth rate in the price appreciation of homes. So something has to give in order for someone to buy, and it's either rates come down. It's all about the payment, right? So whether it's that you're paying more in interest than, you know, paying less for the home or paying less in interest but your home price goes up, you know, there's a relationship there.
[00:24:32] So I think that, you know, to Frank's point, like absolutely not. The housing is, it has like a seven times multiple in terms of the impact on the economy. And regardless of the one thing that AI won't change is that we still all need a place to live.
[00:24:52] So this housing situation is very interesting because, yes, interest rates have a significant impact, but it really goes back to inventory and it goes back to supply. And we just haven't built enough homes over the last couple of decades. So, and then when you look at the homes that we are building, they're not affordable homes. They are the McMansions of the world.
[00:25:20] So that presents a real structural issue, which again, then, you know, supply demand puts pressure on prices, not just in someone wanting to buy a home, but in rentals. Because, you know, if I have a rental property and I know, you know, people can't afford to buy a home, I probably have more latitude even in what I can charge on a rental. So it's very important and it's very important to the economy.
[00:25:50] And I don't see that changing. The one thing I'd like to add here is that we're seeing the K-shaped economy in housing like everywhere else. You know, for the marginal buyer that may not have a high income, that's seeing higher interest rates, and, you know, with a lack of supply of starter homes, it's a problem there. But at the other end, you know, with a booming stock market, the people that are doing well, the market for luxury homes where people are buying in cash, completely different economy there.
[00:26:20] So, you know, we've heard a lot of talk about that K-shaped economy in other areas. We're seeing it show up in housing as well. It really depends on, you know, who the buyer is. You know, it's a very different housing market for the entry-level buyer than it is for the luxury home buyer right now. I have to ask this question again. Carrie, you brought up about the lack of homes. We haven't been building them, but we have been building what you guys are calling the McMansions here.
[00:26:47] If I'm a home builder, I'm probably going to be looking at making the McMansion. I'm guessing that my margins are much better there than they are in a lower-cost home. Absolutely. There you have it. Capitalism at its finest. This is a capitalist economy. And when margins get expanded, which what amazes me with corporate earnings and housing prices,
[00:27:15] is these margins have to be astronomical. And corporate earnings margins are higher than I've ever seen them. And that is not normal. I understand kids coming out of college can't find jobs. Well, they just might get into home building, and instead of making a 40% margin, they'll make a 30% margin or a 20% margin.
[00:27:43] And that's what capitalism is all about. And it will evolve for that entrepreneurial, enterprising young guy who needs the person that needs to make a living. And to me, that's what will happen. We'll continue our look at investing in the economy in future editions. And since you're watching or listening to this podcast, I ask that you hit the like or the subscribe button. So that does it for right now. Thanks again for joining us for this edition of The Bull, The Bear, and You. The Bear, and You.