The Fed Is More Concerned by a Recession, Says Mahn

Kevin, I love during the break when we were talking about Apple, you’re like maybe we’re down to Mag Mag 5 now. I mean, how much shine is being taken out of these stocks like Apple, Tesla, especially as we’re about to hear their numbers. The Mag 7 is very important to the psyche of the investor because most individual investors hold one of those seven positions as do fund companies. And I think to this earnings season, how important it really is according to facts that the information technology sector is expected to grow their earnings by 20% year over year, communication services by 20% year over year, but the rest of the S&P 500 by just one half of 1%. Tech earnings are incredibly important to the psyche of the market and where we go from here. Of course we have to talk about the Fed too, ’cause they’re pretty important. Yeah. I mean, there’s the macro. But since we started on on AI love, you’re gonna both gonna have to help me now with the with, with the sport analogies, yes. I don’t know whether you’re on cricket or or baseball. Baseball, yeah, she can. She can interact guy, not a cricket guy. So as far as AI is concerned, we are in the artificial. So what inning are we in within the artificial intelligence AI game? This is what you had to say. I would suggest that we are just in the batting practice and that AI before the AI doubleheader. So what exactly is, you know, if we’re in embodying practice, what is the doubleheader? Yeah, there’s so much more runway ahead for what artificial intelligence can actually accomplish in our society. Last quarter, we learned that 36% of all SP 500 companies actually use the terminology artificial intelligence or AI in their quarterly earnings reports, the most on record. We’ve learned that Blackstone and Digital Realty have announced a $7 billion joint venture to build data centers all across the world in cities such as Paris, Frankfurt, and even the northern parts of Virginia. We heard Microsoft announced that they’re building over $2 billion worth of data centers in Japan by the end of 2025. Artificial intelligence isn’t just some hot new fed. It truly is transformative. And there’s going to be more and more investment dollars chasing that elusive technology. But maybe Tesla is a lesson. Not necessarily an AI, but you can promise all the growth you want, all the spending you want, and if you don’t come through with profits, it’s not going to benefit you. So in this earnings season, if we are just at batting practice, how much can you really trade on it? Do you need to see the actual fruition of some of these AI projects before you say those valuations are worth it? You can’t wait too long. NVIDIA is an excellent example of that. Unfortunate NVIDIA doesn’t report till May, but I do think that will be the the tide that lifts all the other ships as well once we get to May. Tesla can’t seem to get out of their own way, right? They’ve cut jobs, they’ve cut prices, they’ve abandoned the production of their lower cost vehicle. And now we’ve learned at least last quarter that global deliveries fell for the first time in four years. Their stock doesn’t meet our selection criteria. Let’s them take them out of the MAG 7 altogether. I still think Apple has a lot of promise going forward. But Microsoft, NVIDIA, those are some pretty strong names and they’re going to compete and probably be two of the winners in the overall AI race. I like your punch punchy approach to get them out of that. You talk about your analogy. I was just listening to Jeff Kerry there just before we came to Aaron. He’s talking about the commodity evolution cojoined with AI. But when you look at AI, you talk about the brain, the heart, the limbs, and the nervous system. Do you equally allocate across the functional body or or where or where do you ski? I mean, I hope, I hope, I hope you give a little bit more to the heart. So to to kind of expand upon that. The brain, that’s the software, the algorithms and the models that AI uses, right? Yeah. Then you have the chips and the semiconductor. Everyone talks about NVIDIA, but how about Taiwan Semiconductor, 60% of the global market share and the world’s largest chip foundry. And they also just got a a grant from the Chips and Science Act because of their Arizona subsidiary. Then you look at the hardware companies like Vertiv. Who’s ever heard of Vertiv? They’re industrial companies, but you know what they do? They provide the power, the infrastructure in the cooling solutions to the all important data centers. And the data centers are really the nervous system that make all of this work. Companies such as Equinox, Iron Mountain, and of course Digital Realty. And guess what? All those data centers come from their REIT asset class. Reit’s actually pay pretty attractive dividend yields and Digital Realty has a 3.4% dividend yield. So you get to play in the AI ecosystem, but you also get some income too, Kevin, as you said, it’s not just the earnings, it’s not just tech. It’s also what the Fed does. And here there does seem to be a divide as to whether or not the correction. Correction. I mean, we’re only down like 3% the past six days. It feels like a correction given how calm it’s been. But whether or not it will endure, on one side, you have Marco Kalanovich, who basically says it will endure because you have the issue of higher yields. You have the issues of higher volume. Exactly. And then on the other side of that, you have city who say earnings are going to save us. Which side are you on in the camp that the Fed hasn’t changed since we started this year other than raising their inflation forecast? They actually raised their inflation forecast for the end of this year, core PC, to 2.6%, and they don’t believe inflation comes back to their 2% target until the end of 2026. Yet they’re still forecasting as of March 20th, three rate cuts this year, three rate cuts next year, and another three rate cuts in 2026. That tells me that the Federal Reserve is more concerned with this economic slowdown potentially dipping into a recession than they are with inflation staying above 2%. Will they go through with those three interest rate cuts? I don’t know, but there’s still a path forward. The way I see it, they don’t cut in April, they don’t cut in June. Perhaps they cut for the first time by 25 basis points the end of July. They don’t meet in August. They’re the last meeting before the presidential election is in September. They don’t want to appear too political. They pause in September, they don’t meet in October, and then their next meeting is 2 days after the presidential election. One more cut there and perhaps one more cut in December and they get to their three interest rate cuts. Again, I’m not suggesting that’s going to be the path forward, but there is still a path forward.